A lower-middle-market HVAC company is usually bought with a senior cash-flow term loan and a revolver, often with a delayed-draw facility for add-ons, or a unitranche loan where the buyer needs more debt, with sponsor equity, rollover or a seller note beneath. Senior cash-flow lenders commonly lend 2x to 3.5x EBITDA. Lenders underwrite four things: how much revenue recurs, whether the technicians and managers stay, how seasonal the cash is, and which add-backs survive diligence.
- Usual structure
- Senior term loan and revolver, often with delayed-draw; or unitranche
- Senior leverage
- Commonly 2x to 3.5x EBITDA; unitranche stretches further
- Coverage lenders look for
- Conventional bank lenders commonly look for at least 1.25x
- What lenders probe hardest
- Service-agreement base, technician retention, license holders, seasonality, add-backs
- What platforms add
- Pro forma EBITDA from add-ons, tested by the lender company by company
Why lenders like the trade, and what worries them
Heating and cooling are needs, not wants. When a furnace fails in January or a rooftop unit quits in July, the customer calls that day and the bill gets paid. That is why lenders treat established HVAC contractors as among the more financeable companies in the trades: demand holds up in a downturn, the customer base is local and diversified, and the business has trucks, inventory and receivables behind it. It is also why HVAC is one of the most active trades for private equity platforms, independent sponsors and strategic consolidators.
What worries a lender is not the trade but the company. A contractor that looks steady on its financial statements can be three businesses underneath: a maintenance-and-repair company with a loyal base, a replacement installer living on marketing spend, or a new-construction subcontractor waiting on builders. Each carries different risk when ownership changes. The underwriting question is always the same: which of these earnings will still be here in the second year after closing?
Plumbing contractors are underwritten on the same framework, with differences set out in financing a plumbing company acquisition. A company this size has usually outgrown SBA financing, whose 7(a) loans go up to $5 million.
A lender does not finance the seller's business. It finances the business the buyer will own, which is the seller's business minus whatever leaves with the seller.
Recurring revenue: what lenders count and what they discount
| Revenue line | How a lender reads it | What proves it |
|---|---|---|
| Service agreements (maintenance plans) | The most valued line: contracted, renewing, and the source of later repair and replacement calls | A roster of active agreements with start dates, renewal history and price; cancellations by year |
| Repair and service calls | Recurring in practice if the same customers call back; depends on the phone number, reputation and dispatch | Customer counts and repeat-customer rates from the field-service software |
| Residential replacement | Strong margins but driven by marketing and lead cost; must hold up across years | Revenue and gross margin by year, lead sources, marketing spend |
| Commercial service and planned maintenance | Valued when contracts transfer and are spread across many buildings | Contracts, assignment and change-of-control clauses, concentration |
| New construction | The most cyclical line; tied to a few builders and to starts; often thinner margins | Builder concentration, backlog, payment terms and retainage |
Two companies with the same EBITDA can support very different loans. A company whose revenue is mostly service agreements and repeat service has a floor under it; one whose revenue is mostly new-construction installs has a ceiling over it. When the mix leans cyclical, lenders size more conservatively, ask for more equity and look harder at the last full year against the years before.
Technicians, licenses and management
An HVAC company's capacity is its licensed technicians. Lenders ask how many there are, how long they have stayed, how they are paid against the local market, and whether any are likely to follow the founder out or start a competing shop. A buyer who can show that lead technicians, the service manager and the install manager are staying, with retention arrangements in place before closing, answers the question before it is asked.
The trade license is a question many buyers find late. In many states a contracting license is held by a qualifying individual, often the founder, and a company working in several jurisdictions may depend on several. Lenders will ask who qualifies each license after closing; the answer belongs in the file, not in a condition discovered at closing. Buyers commonly keep the founder on through a transition, often with rollover equity, but lenders want a second qualifier in place.
Owner dependence shows up in who quotes the big jobs, whose name is on the builder and property-manager relationships, and whose reputation brings in the work. A founder who has already handed dispatch, sales and finance to managers makes for a much easier credit. Where the founder is central, lenders look for a real transition plan, a controller or CFO who can report to a lender monthly, and seller paper or rollover that keeps the founder invested in the handover.
How lenders treat the add-backs
Founder-run contractors rarely report earnings the way a lender measures them. Lenders accept add-backs that are documented and will genuinely go away after closing, and reject ones that are really ongoing costs. A quality of earnings review is where most of them are tested.
| Common add-back | How lenders usually treat it |
|---|---|
| Founder's pay above market | Credited only after deducting a market salary for whoever will run the company |
| Family members on payroll who do not work in the business | Credited if payroll records show the cost ends at closing |
| Personal vehicles and costs run through the business | Credited when itemized; a truck used for service calls is not an add-back |
| One-time legal, repair or settlement costs | Credited with invoices showing the cost does not recur |
| Deferred truck and equipment replacement | Not an add-back; lenders often deduct a replacement allowance instead |
| Unpaid founder labor on jobs | Works against the buyer: lenders deduct the cost of replacing it |
Coverage is then measured on the adjusted figure. A simple case: adjusted EBITDA less capital spending of 1,250 against annual debt service of 1,000 is coverage of 1.25x, the level conventional bank lenders commonly look for. If an add-back the seller claimed is rejected and the figure falls to 1,100, coverage drops below that level and the loan shrinks or the equity grows. See EBITDA add-backs and debt service coverage ratio.
Seasonality, working capital and the capital structure
HVAC cash comes in waves: the first hot week of summer and the first cold week of winter fill the schedule, and the shoulder months are quiet. Lenders read monthly revenue, not just annual totals, and want enough revolver availability after closing to carry payroll and debt service through the trough. Commercial and construction receivables can support a borrowing base: asset-based lenders typically advance 80% to 90% of eligible receivables. See sizing a working capital line and seasonal lines of credit.
| Layer | Role in an HVAC acquisition | Watch for |
|---|---|---|
| Senior term loan | Funds most of the price for a platform with a strong service base | Amortization, a leverage covenant and a coverage covenant |
| Revolver | Seasonal working capital and commercial receivables | Availability at the seasonal low point |
| Delayed-draw term loan | Funds add-on contractors on terms agreed at closing | Pro forma leverage tests and how add-on EBITDA is credited |
| Unitranche | One loan where more leverage is needed | A higher blended rate and call protection |
| Seller note, earnout or rollover | Bridges price and keeps the founder invested | Subordination terms the senior lender sets |
| Sponsor or buyer equity | The cushion every lender sizes against | Lenders read it as conviction |
Buyers planning to buy more than one contractor should agree the add-on financing before closing the first; see financing add-on acquisitions, delayed-draw term loans and lending on run-rate EBITDA. The trade-off between one larger loan and senior debt with a layer behind it is in senior debt vs unitranche.
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. The revolver adds an AR aging by customer with days outstanding. An acquisition adds the target's latest full year of figures for every company being bought, never an older year, and the letter of intent. For an HVAC company, four more items shorten underwriting:
- A service-agreement roster: active agreements, price, start date and renewal history.
- A technician and staff roster: role, tenure, license, and who is staying.
- Revenue and gross margin by line of work (service, replacement, commercial, new construction) for each year, by month.
- The license position by jurisdiction: who qualifies today and who will after closing.
Senior bankers run every Midas Partners engagement. Once the documents are in, Midas Partners builds 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 that fit see the blind teaser first, and the client approves each by name before it learns who the company is. See the package.
Common questions
- Do lenders value service agreements?
- Yes, more than any other revenue line, because they renew and generate repair and replacement work. Lenders want the roster, renewal history and price, not just a count. A large base sold at a discount that rarely renews is worth less than a smaller base that renews year after year.
- What if the founder holds the contracting license?
- The buyer needs a plan for who qualifies each license after closing: a staying manager, a new hire, or the founder under an agreed transition. Lenders will ask, and a deal where the business cannot legally operate on day one will not close.
- How do lenders handle seasonality?
- They read monthly revenue and cash, not just annual totals, and want revolver availability after closing to carry payroll and debt service through the slow months.
- Will a lender credit EBITDA from add-ons I plan to buy?
- Not until they are bought. Once an add-on closes, lenders usually credit its EBITDA on a pro forma basis, often with limits on how much projected cost savings they will count.
- Is a plumbing company underwritten differently?
- The framework is the same. Plumbing tends to be less seasonal and more repair-driven; HVAC tends to have larger replacement tickets and more service agreements. The revenue mix, the technicians and the founder's role matter more than the trade.