Most people shopping for an HVAC company fixate on revenue and SDE. That is the wrong starting point.
The number that actually determines whether you paid a fair price is how much of that revenue comes back automatically, year after year, without a sales rep chasing new customers. HVAC businesses with strong recurring revenue are a fundamentally different asset than those running on pure project work. Lenders know this. Smart buyers know this. And the question is whether you know it before you sign the LOI.
Here is how recurring revenue works in HVAC acquisitions, what it does to valuation and underwriting, and what to look for before you put money down.
Why Recurring Revenue Changes the HVAC Valuation Math
A $3M revenue HVAC company built on residential service agreements is not the same asset as a $3M revenue HVAC company built on new construction installs. Both show the same top line. The cash flow story underneath is completely different.
Recurring revenue in HVAC typically comes from three sources: maintenance agreements (also called service contracts or tune-up plans), commercial preventive maintenance contracts, and, increasingly, equipment-as-a-service or monitoring subscriptions.
Maintenance agreements are the most common. A homeowner pays $150 to $300 per year for two seasonal tune-ups and priority service. The HVAC company locks in that revenue at the start of the year and delivers it over 12 months. No bidding. No chasing. No weather dependency.
When you stack 800 of those contracts on top of each other, you have $120K to $240K in contracted annual revenue before the first service call comes in. For a business doing $1.5M to $2M in total revenue, that is a meaningful base.
Lenders view this favorably, and for good reason. A lot of HVAC revenue is weather-dependent and lumpy. A cold snap drives emergency calls. A mild winter kills them. Maintenance agreement revenue smooths that volatility, which makes the cash flow model more predictable and the SBA underwriting cleaner. If you have spent any real time looking at HVAC deals, you have seen how wildly quarterly revenue can swing without a contracted base propping things up.
How Maintenance Agreements Affect SDE and DSCR
This is where the deal mechanics get interesting.
Say you are looking at an HVAC company with $2.1M in revenue, $550K in seller discretionary earnings, and 600 active maintenance agreements at $200 per year. That is $120K in recurring contract revenue.
Now, banks will tell you the SBA minimum DSCR is 1.25x. That is the bank’s floor. It is not ours. We target 2x DSCR on the deals we work, and we treat 1.5x as the true floor below which a deal starts looking dangerous. At 1.25x you are one slow quarter away from stress, and lenders increasingly share that concern even if their official guideline has not caught up yet.
The math on a $2.1M purchase price (roughly 3.8x SDE) at 10% equity injection gives you an SBA loan around $1.89M. At a 10-year term and prevailing SBA rates, annual debt service runs roughly $230K to $260K, depending on the rate. With $550K in SDE, you are above 2x coverage. You have room.
But strip out those maintenance agreements and replace that $120K with one-time project revenue. SDE may hold up in a good year. When a warm winter comes and equipment installs slow down, that $120K does not show up. Your cushion disappears. The lender’s model shows the same volatility, and that changes how they view the deal.
Recurring contract revenue is what keeps you comfortably above our 2x target instead of hovering near a threshold where one bad season creates real problems.
What to Actually Look for in HVAC Service Contracts
Not all maintenance agreements are created equal.
The first thing to check is attrition. How many agreements did the business have 24 months ago versus today? A company with 600 active agreements sounds good. If they had 900 two years ago and are bleeding customers, that is a problem you are buying.
Second, look at the contract terms. Are these auto-renewing? Are they prepaid annually or billed monthly? Prepaid annual agreements look better on paper but create a deferred revenue liability you inherit at close. Work with your CPA to understand how that gets handled in the deal structure. (This is also one of those things that looks straightforward on paper but almost never is in practice, because the timing of when payments were collected versus when services were delivered almost always creates an accounting mess during the asset purchase allocation.)
Third, look at concentration. If 40% of recurring revenue comes from two commercial PM contracts, that is not a diversified recurring base. It is customer concentration risk wearing the costume of recurring revenue.
Fourth, check renewal rates and the actual service delivery model. Some HVAC companies oversell maintenance agreements and underdeliver. High churn is a signal that customers are not seeing value. That problem gets worse after a transition.
Commercial PM Contracts vs. Residential Service Agreements
These are different animals.
Commercial preventive maintenance contracts tend to be larger, multi-year, and more formally documented. A property management company with 15 commercial buildings might sign a 3-year PM contract worth $80K per year. That is $240K in contracted future revenue sitting on the books.
From a buyer’s perspective, commercial PM contracts are excellent if they transfer. The risk is assignability. Some commercial contracts have change-of-ownership clauses that allow the customer to walk when the business sells. Your attorney needs to review every material commercial contract in due diligence. Non-transferable contracts should be reflected in your price.
Residential service agreements are stickier in practice even though they are easier to cancel. Homeowners rarely think to cancel unless something goes wrong. Attrition on well-run residential plans typically runs 10% to 20% annually. If you are renewing 80% to 90% of your book, that is a solid base.
A business with a mix of both is generally the strongest recurring revenue profile. You get the size and term length of commercial contracts with the diversification of a large residential base. We have seen this combination perform the most consistently across ownership transitions.
What Strong Recurring Revenue Does to HVAC Multiples
HVAC businesses typically trade between 2.5x and 4x SDE in the $500K to $5M acquisition price range. Where a specific company falls depends on size, geography, growth trajectory, and how dependent the business is on the owner.
Recurring revenue is a direct multiple driver.
An HVAC company where 30% to 40% of revenue is under contract will command a higher multiple than a comparable business running entirely on project and emergency call work. The market recognizes the difference. Brokers price it in. Sellers use it as a negotiating point.
What buyers often miss is that a premium multiple on a business with genuine HVAC business recurring revenue can still be a better deal than a lower multiple on a purely transactional business. If the $550K in SDE is stable and predictable because it sits on $400K in contracted recurring revenue, you are buying certainty. That is worth something.
If the same $550K comes from a handful of big installation jobs that might not repeat, you are buying hope dressed up as historical performance. Different risk profile entirely. A lower multiple should reflect it.
So That Covers the Revenue Side. Now the Diligence.
All of that analysis matters, but it means nothing if you cannot verify the numbers. Here is what we pull on every HVAC acquisition with a recurring revenue component.
Get a full account-level export of the service agreement database. Name, address, contract start date, renewal date, annual value, and last service date. You want this in a spreadsheet, not as a summary number from the broker.
The summary number is almost always inflated, sometimes significantly.
Ask for 24 months of service agreement revenue by month, separated from install and repair revenue. This tells you actual renewal behavior and seasonality on the recurring side of the book.
Review 3 years of tax returns and compare the reported maintenance agreement revenue line to the current claim. Sellers sometimes count agreements that have not renewed in a year. The tax return does not lie. If the numbers do not tie to what the broker is representing, that is your proof of cash moment, and you need to trust the returns over the pitch deck.
If commercial PM contracts represent more than 20% of total recurring revenue, get copies of those contracts before LOI. Do not wait for due diligence to find out the biggest one has a 90-day termination clause.
And understand who manages the relationships. If the owner personally handles all commercial PM renewals and is the named contact on every major account, you have key-person risk baked into your recurring revenue. Factor that into your seller note structure and transition plan.
Structuring the Deal Around Recurring Revenue Risk
When we negotiate deals with significant recurring revenue, we build the risk into the structure. Not just the price. The structure.
A seller note tied to contract retention is one approach. The full seller note amount is not released until a defined percentage of service agreements renew under new ownership. Say the seller is carrying $150K in a note. If 85% of agreements renew in year one, full payment. If attrition runs higher, the note is reduced proportionally.
We push for full standby at 0% interest on seller notes across our deals, and we achieve that on roughly 90% of them. When recurring revenue is part of the value proposition, tying that note to retention milestones aligns incentives perfectly. The seller helps with the transition. Customers stay because the handoff is smooth. You are not paying for revenue that disappears when ownership changes.
Earnouts on recurring revenue milestones are another option, though more complex to document and administer. For smaller deals in the sub-$2M range, a simple retention-linked seller note is usually cleaner.
On the SBA side, lenders typically want to see that recurring revenue has been stable for at least 12 to 24 months before they will factor it into their cash flow model. Bring the data. Not summaries. Actual contract history. Three years of tax returns. Minimum.
Frequently Asked Questions
What percentage of revenue should be recurring for an HVAC acquisition to make sense?
There is no hard minimum, but we look for at least 15% to 20% of total revenue under contract before we treat a business as having a genuine recurring base. Below that, you are really buying a project business with a few maintenance agreements bolted on. Above 30%, the recurring component becomes a real value driver that supports deal structure and lender underwriting.
Does SBA 7(a) lend on HVAC businesses with primarily service agreement revenue?
Yes. SBA 7(a) is well-suited for HVAC acquisitions, and lenders view service agreement revenue favorably because it reduces cash flow volatility. Standard requirements apply: 10% equity injection, personal guarantee, and the SBA minimum of 1.25x DSCR, though we target 2x and treat 1.5x as the real floor. Stable recurring revenue helps you clear those thresholds more comfortably across different economic scenarios.
How do I value HVAC maintenance agreements in an acquisition?
The most common approach is a multiple of annual contract value, typically 0.5x to 1.5x depending on attrition rate, contract terms, and renewal history. A book of 700 agreements at $220 per year running 88% retention might be valued at 1.0x to 1.2x annual contract value, or $154K to $185K. That value is reflected in the overall business price, not added on top of it.
What is the biggest mistake buyers make with HVAC recurring revenue?
Taking the seller’s summary at face value. A broker might say “650 active service agreements” and that number is technically true for agreements in the system. Whether those customers have paid their renewal, whether the service has been delivered, and whether the agreements auto-renew are separate questions entirely. Pull the actual contract database and verify independently during due diligence.
Can recurring revenue help negotiate a lower equity injection on an SBA deal?
Not directly. SBA requires a minimum 10% equity injection regardless of business quality. But strong recurring revenue can support a higher overall purchase price while still clearing DSCR requirements, which sometimes allows buyers to structure a larger acquisition within the same equity budget. Better cash flow predictability does not change the injection percentage. It changes how much business you can buy with the same dollars.
Looking at HVAC Acquisitions?
Regalis Capital works with buyers pursuing HVAC and other essential services businesses in the $500K to $5M range. We source deals, build the financial models, negotiate structure, and manage the SBA process from LOI to close.
If you are serious about buying an HVAC business and want a team that has been through this process hundreds of times, start here.