A $1.6M HVAC company. $490K in what the listing calls seller’s discretionary earnings. Owner retiring after 22 years. Every truck branded, every tech certified, and a recurring maintenance contract base that throws off cash like clockwork.

Before you anchor on that $490K number: SDE is almost always inflated. We discount it 15% to 50% to get to real cash flow, depending on how aggressive the add-backs are. On HVAC deals specifically, the owner’s personal truck, a spouse on payroll, and “one-time” repairs that happen every year are the usual culprits. The real number on this deal might be $330K. Might be $410K. You do not know until you verify.

That said, the deal structure works with an SBA 7(a) loan. Most buyers looking at it do not know how to put it together, what the lender actually needs, or why the equity injection math changes everything at this price point.

Here is how SBA financing works specifically for HVAC acquisitions, from underwriting to close.

Why HVAC Businesses Are Strong SBA Loan Candidates

SBA lenders like businesses with predictable, recurring revenue. HVAC companies with active maintenance contracts check that box immediately.

A company doing 60% or more of its revenue through service agreements and repeat residential or commercial customers looks very different in underwriting than a project-based outfit chasing new construction. Lenders want to see that the cash flow does not disappear the moment the previous owner walks out. Recurring contracts give them that comfort, and HVAC is one of the few industries where a meaningful chunk of revenue genuinely recurs year over year without heavy sales effort.

HVAC also benefits from strong barrier to entry at the technician level. EPA certification, NATE credentials, and years of routing familiarity with a customer base are not easily replicated. That moat matters to underwriters assessing continuity risk.

From what we have seen across hundreds of acquisitions, HVAC businesses in the $500K to $3M range transact regularly on SBA 7(a) loans. The recurring revenue model, stable margins, and hard asset base (trucks, equipment, tools) make them among the cleaner deals to push through underwriting. Not easy. But cleaner than most.

The Equity Injection and Deal Structure

Here is where most buyers get confused, so it is worth getting specific.

An SBA 7(a) loan for an HVAC business acquisition follows the same core structure as any business acquisition loan, with a few industry-specific nuances. The maximum loan amount is $5M. On most HVAC deals in the $1M to $3M range, the structure looks like this: the SBA 7(a) loan covers 80% to 90% of the purchase price, the buyer brings a minimum 10% equity injection, and the gap (if any) is filled with a seller note.

The equity injection minimum is 10%. On a $1.5M acquisition, that is $150K. That money can come from personal savings, a 401(k) rollover through a ROBS structure, or a home equity line of credit. It cannot be borrowed from a third party without lender disclosure and approval.

Loan terms for business acquisitions typically run 10 years. Interest rates are variable, tied to prime, with a spread set by the lender within SBA guidelines.

One thing buyers get confused about: the SBA is not actually the lender. The SBA guarantees a portion of the loan (you can verify current guarantee percentages and program details at SBA.gov), which allows banks and credit unions to approve deals they otherwise would not take on. You are working with an SBA-approved lender, not the government directly. That distinction matters because different approved lenders have different risk appetites, different processing speeds, and different documentation requirements.

The DSCR Math That Actually Matters

Forget the listing price for a second. The number that determines whether your HVAC deal gets funded is the debt service coverage ratio.

We target 2x DSCR on the deals we run. That is the standard. A 1.5x DSCR is the floor, acceptable only when there are legitimate, documentable synergies or cost reductions available post-close. And to be direct about it: SBA lenders will tell you their minimum is 1.25x. At 1.25x, a single bad month, one lost commercial contract, or an unexpected truck replacement puts you underwater on loan payments. That is not a margin of safety. That is a tightrope.

Here is how the math plays out. Say you are acquiring an HVAC company for $1.4M with $420K in adjusted SDE (and you have already discounted that SDE number, verified it against tax returns, and run proof of cash). Your annual debt service on a $1.26M SBA loan at current rates over 10 years runs roughly $170K to $185K per year depending on rate environment. That puts your DSCR around 2.3x to 2.5x. That deal clears underwriting with room to breathe.

Now change the acquisition price to $1.8M on the same $420K SDE. Debt service jumps to roughly $220K to $235K. DSCR drops below 1.9x. Still workable, but the margin for error shrinks and lenders start looking harder at everything else in the file.

Push to $2.2M and you are at or below 1.5x. Most lenders start asking hard questions at that level, and we would be asking harder ones.

What Else Lenders Review

DSCR is the gatekeeper. But it is not the whole picture.

Lenders also want to see:

  • Three years of business tax returns (not just P&Ls)
  • Owner W-2s and personal tax returns
  • Accounts receivable aging
  • Equipment list and condition
  • Customer concentration (is 40% of revenue from one commercial account?)
  • Buyer’s personal credit score (typically 680 minimum, 700+ is cleaner)
  • Buyer’s liquidity after injection (lenders do not want to see you go to zero)

Customer concentration is a real underwriting concern in HVAC. A residential-focused company with 2,000 customers rarely has concentration issues. But a commercial HVAC contractor where one property management group represents 35% of revenue will face lender scrutiny and potentially a price reduction request.

Side note: this is also where proof of cash matters enormously. Every add-back the seller claims should be traceable to a specific line on the tax return and confirmed against bank deposits. If the P&L says one thing and the bank statements say another, none of the DSCR analysis above holds up.

How Seller Notes Work in HVAC Acquisitions

Seller notes are common in HVAC deals and they work in the buyer’s favor when structured correctly.

A seller note is a portion of the purchase price the seller agrees to receive over time rather than at closing. On a $1.5M deal, the seller might take $1.2M at close from the SBA loan and hold $150K as a seller note.

On over 90% of the deals we structure, we get seller notes into a 10-year full standby position at 0% interest. Zero interest. Zero payments. For 10 years. The entire amount is deferred until the SBA loan is paid off.

Related: Franchise for Sale in San Diego: What Buyers Miss

That structure dramatically improves DSCR because the seller note payments are excluded from debt service calculations during the standby period. It is the single most impactful structural lever a buyer has, and most buyers do not push for it because they assume the seller will say no.

Sellers agree to this more often than you would expect. They want the deal to close. A 0% standby note is better than no deal. And in most cases, they are already walking away with a significant cash payment at closing from the SBA loan proceeds.

All of That Covers the Financing Side. The Transaction Costs Are a Separate Conversation.

Buyers focus on the equity injection and miss the other costs. Do not be that buyer.

On a $1.5M HVAC acquisition, total closing costs outside the equity injection often run $40K to $65K. Here is what to expect:

  1. SBA guarantee fee: 3.5% of the guaranteed portion of the loan (on deals above $1M)
  2. Lender origination fees: 0.5% to 1% of loan amount
  3. Third-party QoE (quality of earnings) report: $5K to $15K depending on deal size
  4. Environmental assessment (if real estate is involved): $1,500 to $3,500
  5. Attorney fees for APA review and closing: $5K to $10K
  6. Business valuation (sometimes required by lender): $3K to $7K

Budget for it. Buyers who do not plan for these costs end up scrambling at the finish line or asking the seller to adjust the price, which creates friction at the worst possible moment.

One item specific to HVAC: if the company owns vehicles (and most do), the lender will want a clear picture of the fleet age, book value, and whether deferred maintenance exists. Trucks with 180,000 miles and no replacement plan are a soft underwriting flag. Not a deal killer, but expect questions.

Structuring the LOI to Pass Underwriting

The way you structure the letter of intent determines how clean the SBA approval process runs. Get this wrong and you are renegotiating during underwriting, which stalls deals and frustrates everyone involved.

A few things we see buyers get wrong on HVAC acquisitions specifically:

Paying for goodwill without justification. SBA lenders will push back on high goodwill allocations in the asset purchase agreement without supporting documentation. If you are paying a 4x multiple on an HVAC business, be ready to defend it. Customer lifetime value, contract transferability, and brand reputation all factor in. Document them before you get to underwriting, not after the lender asks.

Not verifying add-backs. Sellers claim personal expenses run through the business: personal vehicle, cell phones, health insurance, a family member on payroll who does not actually work there. Some add-backs are legitimate. Some are aggressive. Every add-back should be traced to a specific line on the tax return. Not the P&L. The tax return. Lenders will ask, and if you cannot answer, your DSCR calculation falls apart.

Skipping the transition plan. For HVAC businesses where the owner is the lead technician or primary customer relationship holder, lenders want to see a documented transition plan. How long is the seller staying on? What is the training period? A 90-day transition with documented overlap is standard. Anything shorter raises flags with underwriters who have seen too many deals where the owner left and the customers followed.

The LOI should address purchase price, allocation, seller note structure, training period, and any real estate terms. Lock these down before you start the SBA application.

Working Capital and What Happens After Close

Closing the deal is not the finish line. You need capital to run the business on day one.

SBA 7(a) loans can include a working capital component, but it is not automatically included. You need to request it and justify it during the loan application. For HVAC businesses with seasonal revenue swings (which is most of them, since demand drops in mild weather months), working capital is worth building into the loan structure rather than tapping personal savings after close.

Typical working capital included in SBA acquisition loans runs 2 to 3 months of operating expenses. On a $1.2M revenue HVAC business with 55% operating expense ratio, that is roughly $110K to $165K. Including this in the loan costs you slightly more in monthly debt service but avoids cash crunches in the first operating year. We consider working capital non-negotiable on acquisitions. Two to six months, depending on the business and its seasonality.

And do not overlook the non-compete clause in the APA. A well-structured non-compete (typically 3 to 5 years, covering the service area) protects the business value you just financed. Your attorney should negotiate geographic and time scope before you sign. A weak non-compete on an HVAC deal is an invitation for the previous owner to open a competing shop two miles away and take half the customer base with him.

Frequently Asked Questions

Can I use an SBA loan to buy an HVAC business with no industry experience?

Yes. SBA lenders do not require industry-specific experience to approve a business acquisition loan. They assess overall management experience, the business’s standalone cash flow, and your ability to hire qualified operators. Bringing on a seasoned HVAC manager or lead technician post-close addresses lender concerns about operational continuity. That said, this is an active operator role, not a passive investment.

What credit score do I need to get an SBA loan for an HVAC business?

Most SBA lenders want a personal credit score of at least 680. Above 700 makes approval cleaner and can improve your rate. Derogatory marks, recent collections, or a prior bankruptcy complicate the application significantly. Some lenders will consider exceptions with strong compensating factors like high liquidity or a substantial equity injection, but do not count on it.

How long does it take to close an SBA loan on an HVAC acquisition?

From signed LOI to funded close, most SBA 7(a) deals take 60 to 90 days. In rare cases where financials are spotless, the seller is highly responsive, and your lender has no backlog, closings in the 45 to 50 day range have happened. But that is the exception, not the baseline. Complicated asset allocations, pending litigation, or lender backlogs push timelines toward 90 to 120 days. Plan for 75 and you will be in the right range.

What is a realistic SBA loan amount for buying an HVAC company?

The SBA 7(a) program caps at $5M. Most HVAC acquisitions we see in the $500K to $3M price range use loans between $450K and $2.7M, give or take. The specific amount depends on the purchase price, equity injection, and any working capital included. The lender determines the final loan amount after underwriting, not at the LOI stage.

Does the HVAC business need to own real estate to qualify for an SBA loan?

No. Most HVAC businesses operate out of leased facilities or home-based dispatch setups. Real estate is not required for SBA 7(a) business acquisition financing. If the business does own real estate, it complicates the deal structure somewhat and may require a separate SBA 504 component. Your lender will advise on the right structure based on what assets are included in the sale.

Looking to Acquire an HVAC Business?

Regalis Capital works with serious buyers acquiring businesses in the $500K to $5M range. We source deals, run the financial models, structure the LOI, negotiate seller notes into full standby, and manage the SBA process from application to close.

If you are looking at an HVAC company and want a team that does this every day, start the process here.