HVAC · Checklist · Pre-LOI
The HVAC Earnings Checklist: What to Request Before the LOI
Work down this list with the seller's package open. It tells you what to ask for, why, and whose job it is to check the answer.
By Mark Hirsch, Founder, TrueQoE · Managing Member, Strategic Lever LLC.
An HVAC listing asks you to believe three things: the revenue repeats, the cost of the work is what the P&L says, and the owner's add-backs are real. Each section below tests one of them. Request the records before the LOI, while asking costs you nothing and the seller still wants the deal.
How to read the tags. “First Pass reports this” marks the only items a TrueQoE First Pass covers: tying each year to its stated totals, labelling each adjustment by its evidence, and listing missing records. Every other tag names who should check the item. Those items are guidance, not First Pass outputs.
Which financial records should an HVAC seller provide?
Short answer: The P&Ls, balance sheets and tax returns for every year the asking price relies on, the add-back schedule, and monthly P&Ls. Without them, the earnings figure can't be tied out.
- Annual P&Ls and balance sheets for each year the price relies onThe base the earnings figure is built from. Each year should agree with its own stated totals.First Pass reports this
- The seller's add-back schedule, line by lineEvery add-back should name an amount, a year and a reason. Each one gets an evidence label.First Pass reports this
- Business tax returns for the same yearsCompare them with the P&Ls. Differences aren't necessarily improper; they need an explanation.Your CPA
- Monthly P&Ls for the same yearsThey show the season, and whether the trailing twelve months end on a peak.You · Your CPA
- The accounting method, and how prepaid maintenance agreements are recordedCash-basis books record agreement revenue when it's paid, not when the visits happen.Your CPA
How do you test HVAC revenue quality?
Short answer: Split it. Maintenance agreements, service calls and replacement installs behave differently, and you need to know which one produced the earnings.
- Revenue by type (agreements, service, installs; residential and commercial) by monthInstalls follow the weather and equipment age. Agreements follow renewals.You · Your CPA
- The active maintenance agreement list, with start dates, renewal dates and pricesThe base you're paying for, in names rather than a total.You
- Agreement renewal historyAn agreement that doesn't renew isn't recurring revenue.You
- The largest customers and any commercial or builder contracts, with terms and assignment clausesA contract that can't move to a new owner may not come with the business.You · Your attorney
- Consumer financing program terms, and any fees the finance company deductsFind out whether revenue is booked gross or net of those fees.Your CPA
What should you check about technicians and payroll?
Short answer: Price the work without the owner and without unpaid family help. The payroll shows what the work cost this owner, not what it will cost you.
- The payroll register by employee, with roles, overtime and commission or spiff paymentsPeak-season overtime and install commissions move with volume.Your CPA
- Payroll records behind any family-payroll add-backThe label tells you what the file supports. Whether the job still needs doing is your call.First Pass reports this
- A list of everyone who works in the business without a market wage, including the owner and familyThat work becomes a cost the day you take over.You
- Anyone paid as a contractor, and what they doClassification affects cost and risk.Your CPA · Your attorney
- Key technicians' tenure, and any retention or non-compete arrangementsThe customers often know the technician, not the company.You · Your attorney
How do you check the trucks, the fuel and the owner's vehicle?
Short answer: Get the fleet list with drivers and title holders, the fuel card statements, and the support for any vehicle add-back.
- Support for the owner's vehicle add-back: title or lease, loan statements, mileage logLabelled by its evidence in the report. A wrapped truck in the driveway is not a mileage log.First Pass reports this
- The fleet list: each vehicle, its driver, title or lease holder, and ageShows what the business pays for and who uses it.You
- Fuel card statements by card and driverWeekend and out-of-area fuel is where personal use shows up.You · Your CPA
- Planned vehicle and equipment replacements, and recent major repairsSDE excludes capital spending. An aging fleet is a cost you'll fund.You · Your lender
What about warranty callbacks, licensing and insurance?
Short answer: These rarely appear as a line on the P&L, which is exactly why they need asking about.
- A callback log, or job records for warranty work, by yearUnbilled labor on recent installs is a running cost, not a one-time one.You
- Manufacturer warranty and dealer agreementsWhat's covered, what isn't, and whether the agreements transfer.Your attorney
- Contractor and mechanical licenses: who holds them, and whether they stay with the businessIf the license is the owner's, the company may not be able to operate without them.Your attorney
- Insurance policies and claims historyClaims history affects what coverage will cost you.Your insurance advisor
- Anything the First Pass lists as missingSend the list to the broker as your next request.First Pass reports this
The items tagged for a First Pass are the ones you can test from the documents already in hand. The rest are where you point your CPA, attorney and lender. You'll get better answers asking them before exclusivity than during it.