Buying an HVAC business: financial checks before closing

Separate the kinds of revenue

Ask for monthly revenue split between service calls, maintenance agreements, equipment replacement and installation projects. Use the categories the business actually tracks. Annual totals can hide a busy season, an unusually large project or a change in customer mix.

For maintenance agreements, ask how many are active, when customers pay, what service remains owed and how cancellations are handled. A prepaid agreement can bring in cash before the related visits happen. Review transferability with your lawyer rather than assuming every agreement stays after the sale. If the seller has already collected the money, quantify the service still owed and ask your advisers how the purchase terms and closing adjustments account for it.

Check what the owner actually does

List the owner's weekly responsibilities. Quoting jobs, managing technicians and handling key accounts may need a replacement even if the seller presents their compensation as an add-back. Family payroll deserves the same question: does that person do work the business still needs? Replacing all of those duties may require more than one person.

Ask for support for each proposed adjustment. A repair described as exceptional needs context from other periods. A cost disappearing from the seller's books does not establish that the buyer can operate without it.

A small example

Fictional example, all amounts in USD for the same year: the seller presents $400,000 of seller's discretionary earnings (SDE). That figure already adds back the working owner's full compensation and $80,000 of marketing spending that the seller describes as exceptional. Your review indicates the $80,000 is a recurring cost the buyer will still incur, so you reverse that add-back. This leaves $320,000 before paying someone to replace the owner's work.

For a buyer who hires a manager, assume $100,000 of annual replacement cost, including salary, employer payroll costs and benefits. That cost is not already included in the $320,000 and does not overlap the marketing adjustment. Subtracting it leaves $220,000 of illustrative earnings after replacement compensation. If a buyer performs the role themselves, show their compensation and workload separately rather than assuming their labor is free.

The $220,000 is not take-home cash or cash available for debt payments. Equipment spending, changes in working capital, taxes and financing still need separate analysis. The figures are invented, the replacement cost is not a market benchmark, and the calculation is not a valuation or client result.

Follow the job into the records

Choose jobs from different months and service categories. Compare the estimate, final invoice, labor, equipment and materials, credits and payment. Ask how callbacks and warranty work are recorded. Do the accounts show those costs against the work that caused them, or in a separate overhead account?

An equipment list also needs context. Identify vehicles and tools that are owned, financed or leased. Ask who will assess their condition and what the business expects to replace. Financial review does not substitute for a qualified physical inspection.

Questions to bring to the seller

Turn unresolved items into decisions

Keep a short list of each unexplained item, the evidence needed and who will answer it. Separate a missing document from a confirmed adjustment. The buyer, lender and advisers can then decide which issues affect financing, price, purchase terms or whether to continue.

The SBA's business-buying guidance describes due diligence as a broader investigation that includes financial statements, tax returns, contracts and transaction documents. This checklist covers financial questions only; legal, tax and technical matters need the appropriate advisers.