A lower-middle-market plumbing company is usually bought with a senior cash-flow term loan and a revolver, or a unitranche loan where the buyer needs more debt than a senior lender will give, with equity, rollover or a seller note beneath it. Senior cash-flow lenders to lower-middle-market companies commonly lend 2x to 3.5x EBITDA. Lenders size the loan on the service and drain base the company owns, discount builder and home-warranty work, and test who holds the licenses, whether the technicians stay, and what the fleet needs.
- Usual structure
- Senior term loan and revolver, or unitranche; equity, rollover or a seller note beneath
- Senior leverage
- Commonly 2x to 3.5x EBITDA; unitranche stretches further
- What lenders value most
- Repair, drain and commercial service across a broad customer base
- What lenders discount
- Builder rough-in, home-warranty dispatch, revenue tied to one person
- Settle before the letter of intent
- Who qualifies each license and certification the day after closing
Who buys plumbing companies at this size
In the lower middle market, a plumbing company is rarely bought by one person looking for a job. The buyers are private equity platforms building a regional home-services group, independent sponsors assembling their first platform, strategic buyers adding a trade to an HVAC or electrical company, and management teams buying out a retiring founder. Each brings a different equity check and a different lender set, but the lenders ask the same questions about the business.
Plumbing and HVAC are often grouped together, and the shared framework of technicians, maintenance revenue and add-backs is set out in financing an HVAC company acquisition. Three things set plumbing apart in a lender's eyes. Demand is less seasonal: pipes burst in July and drains back up every month. Revenue is less often contracted: a plumbing company usually has fewer maintenance agreements than an HVAC shop, so its recurring base is repeat customers and commercial accounts. And the work splits sharply between service, which answers calls at a good margin, and construction, which roughs in plumbing for builders on thinner margins with slower pay. Many companies do both, and the loan depends on the proportion.
At this size a company has usually outgrown SBA financing, whose 7(a) loans go up to $5 million. The debt comes from banks, private credit funds and asset-based lenders, and how much of it a deal can carry is the subject of how much debt a business can carry.
The kinds of work, and how a lender weighs each
| Type of work | How a lender reads it | What proves it |
|---|---|---|
| Emergency service and repair | The core of a financeable plumbing company: needs-driven, repeat, paid at the job | Call counts, average ticket and repeat-customer share from the dispatch system, by month and year |
| Drain, sewer and line work | High margin and recurring for commercial accounts; large line replacements carry warranty and excavation risk | Revenue by service line, equipment list, warranty claims history |
| Water heaters and repipes | Replacement work driven by marketing and lead cost; good margin, lumpier than repair | Job counts and gross margin by year; lead sources and cost per lead |
| Backflow testing and inspection | Recurring where local codes require periodic testing; a door into commercial accounts | Testing accounts, renewal history, the testers' certifications |
| Commercial service accounts | Valued when spread across many facilities and property managers | Revenue by account; service agreements and whether they transfer on a change of control |
| New-construction rough-in | The most cyclical line, concentrated in a few builders, often with retainage | Builder concentration, backlog, payment history, retainage receivable |
| Home-warranty and third-party dispatch | Volume at a price the dispatcher sets; treated as concentration | Share of revenue by dispatcher, margin on that work |
A company that earns most of its profit from service and drain work to a broad base supports more debt than one with the same earnings from builder work, and a lender believes its latest year more readily. When construction or warranty-company work dominates, expect lower leverage, closer scrutiny of the trend across years, and the questions covered in customer concentration in an acquisition.
Recurring revenue, and where the calls come from
Cash-flow lenders pay for predictability. In plumbing that means repeat residential customers, commercial accounts with a history of renewal, membership or maintenance plans where they exist, and regulated testing work. A buyer should be able to show, from the dispatch and billing systems, what share of revenue came from customers the company served in the prior year. That single analysis often moves a lender more than any add-back.
Lenders also ask what makes the phone ring and whether it survives the sale:
- Assets that should transfer: phone numbers, websites and domains, search and review listings, the dispatch and customer database, and the trade names. In an asset purchase each is assigned at closing; confirm none is registered to the seller personally.
- The marketing trend: call volume, booking rate and average ticket over time, and marketing spend against revenue. A company whose calls depend on steadily rising paid advertising is a weaker credit than one whose calls come from repeat customers and its reputation.
- Pricing discipline: a company that prices from a documented price book, rather than the owner's judgment on each job, is easier for a new owner to run and easier for a lender to believe.
Licenses, technicians and key people
Most states license plumbing work through individuals, and a plumbing business operates under licensed master plumbers who are responsible for its work and permits, often location by location. In a founder-run company the founder may still hold the license in one or more jurisdictions. Lenders will not close a deal that leaves any branch unable to pull permits, so the buyer needs to know who qualifies each license from day one and whether that person has signed on to stay.
Technicians are the capacity of the business. Apprentices generally must work under licensed supervision, so the number of licensed plumbers limits how much work the company can take. Lenders ask for a technician roster with licenses, certifications and tenure, turnover by year, and how pay compares with the local market. Backflow, medical-gas and similar certifications also belong to individuals; if one technician holds the certification behind a recurring revenue line, expect the question of what happens if that person leaves.
Key-person risk extends to the management team. A lender financing a platform wants a general manager, a service manager and a controller who will run the business under the new owner, and it reads retention and rollover arrangements as evidence that they will.
Find out who qualifies each license, and who holds each certification behind a revenue line, before you sign the letter of intent.
Fleet, warranties and working capital
Each service truck carries parts inventory, and drain and sewer work adds jetters, cameras and sometimes excavation equipment. Trucks wear out on a schedule. Lenders look at fleet age and mileage, and if the seller stopped replacing vehicles before the sale, they treat the catch-up as a cost of the business. A simple example: EBITDA of 1,400, less a fleet replacement allowance of 150, leaves 1,250 against annual debt service of 1,000, which is coverage of 1.25x, the level conventional bank lenders commonly look for. The distinction is set out in maintenance capex and maintenance vs growth capex.
Plumbing companies guarantee their work, and some of it fails later: a repipe that leaks, a sewer line that settles. Lenders ask for callback history and cost by year, and for liability and completed-operations insurance with loss runs. Where recent large jobs carry warranty exposure, buyers often negotiate an escrow or holdback; see escrows and holdbacks in acquisition financing.
Service work is usually paid at the job, so a service-heavy company carries few receivables. Commercial and construction work is billed later, with retainage held on builder jobs. The more of that work a company does, the more its revolver matters and the more carefully the working capital peg needs setting. Commercial receivables can support a borrowing base: asset-based lenders typically advance 80% to 90% of eligible receivables, and receivables more than 90 days past invoice are typically ineligible.
How the capital structure is usually built
| Layer | Role in a plumbing acquisition | Watch for |
|---|---|---|
| Senior term loan | Funds most of the price for a platform with a strong service base; commonly 2x to 3.5x EBITDA | Amortization, a leverage covenant and a coverage covenant |
| Revolver | Working capital for commercial and construction receivables | A borrowing base if it is asset-based; who controls collateral |
| Delayed-draw term loan | Funds add-on acquisitions on terms agreed at closing | Conditions to draw: pro forma leverage, the add-on's figures |
| Unitranche | One loan in place of senior plus subordinated debt when more leverage is needed | A higher blended rate and call protection |
| Mezzanine or second lien | A layer behind the senior loan when senior alone falls short | Intercreditor terms, PIK and warrants |
| Seller note or rollover equity | Bridges price and keeps the founder invested | Subordination terms the senior lender will require |
| Sponsor or buyer equity | The cushion every lender sizes against | Lenders read it as the buyer's conviction |
Plumbing is a common buy-and-build trade. A platform that plans add-ons should agree a delayed-draw facility at closing and understand how the lender will treat each acquired company's earnings; see financing add-on acquisitions and lending on run-rate EBITDA. The choice between one larger loan and a senior loan with a layer behind it is covered in senior debt vs unitranche. Independent sponsors should also read independent sponsor debt financing.
Where the company owns its shop and yard, the real estate can be financed separately or kept out of the deal; see business acquisitions with real estate.
What goes in the file
For the term loan, lenders start with the P&L, the balance sheet and the debt schedule, with a year-to-date P&L through the last month-end and an AP aging where available. For an acquisition they add the target's latest full year of figures for every company being bought, never an older year, and the letter of intent. A revolver adds an AR aging by customer with days outstanding. For a plumbing company, expect requests for:
- Revenue and gross margin by type of work for each year, and repeat-customer share.
- Dispatch reports: call volume, booking rate, average ticket and lead sources.
- The license position by jurisdiction, and a technician roster with certifications, tenure and who is staying.
- A fleet and equipment list with year, mileage or hours, and any liens.
- Callback history, insurance policies and loss runs.
- For construction work: builder concentration, backlog and retainage.
Senior bankers run every Midas Partners engagement. Once the documents are in, Midas Partners builds the full lender package, the financing model, lender presentation, blind teaser and underwriting memo, in a day; built by hand the same package takes at least a week. Software does the analyst work and a senior banker checks every page before the client approves it. Lenders in the book that fit see the blind teaser first, and the client approves each one by name before it learns who the company is. See the package and how we underwrite.
Common questions
- Is a plumbing company easier to finance than an HVAC company?
- Often slightly, because plumbing demand is less seasonal and more repair-driven. HVAC companies tend to have more maintenance agreements. The revenue mix, the license position and the depth of management matter more to a lender than the trade.
- Does backflow testing count as recurring revenue?
- Lenders usually treat it as recurring where local codes require periodic testing and the company has a renewal history with the same accounts. It is valued more if several technicians hold the certification.
- Much of the work comes from a home-warranty company. Is that a problem?
- It is concentration. One company controls the flow of work and the price, and can stop sending it. Lenders discount that revenue and look for the service base the company owns directly.
- Can the founder stay on to hold the license?
- In a conventional deal, yes, if it is agreed. Many buyers keep the founder on under an employment or consulting agreement, often alongside rollover equity. Lenders still want a plan for when the founder leaves, such as a second licensed manager in each jurisdiction.
- Can a platform finance future add-ons at closing?
- Often, through a delayed-draw term loan or an accordion agreed with the acquisition loan. Each draw usually has to meet a pro forma leverage test using the add-on's own figures.