HVAC Business SDE Calculation: Real Company Example

HVAC businesses often command premium valuations—skilled labor creates a barrier to entry, recurring maintenance contracts provide stable revenue, and essential services mean demand persists through economic cycles. But realizing that premium requires an accurate SDE calculation that properly handles the complexities common in these businesses.

In this guide, we'll work through a real-world case study of an established HVAC company with two working owners.

The Case Study: Summit Mechanical Services

Summit Mechanical Services is a 12-year-old HVAC company specializing in residential and light commercial heating, cooling, and ventilation. The business has grown steadily under the leadership of two owners who handle complementary roles:

• Owner 1 (General Manager): Oversees operations, manages the technician team, handles estimating and major client relationships
• Owner 2 (Office Manager): Manages scheduling, bookkeeping, accounts receivable, and administrative staff

The company employs 12 people total, including both owners. The team includes HVAC technicians, apprentices, and administrative support. This is a well-staffed operation—not a one-person shop dependent on the owner turning wrenches.

The owners lease a 4,000 square foot facility with office space, warehouse, and truck bays at $40,000 per year—reasonable for their market.

The Financials: Four Years of Growth

Summit shows the kind of trajectory buyers love to see:

Revenue grew from $2.4M to nearly $3M over four years—a 23% increase. Net income grew proportionally, and margins remained healthy around 8%. This is a business with momentum.

The Two-Owner Challenge

Here's where HVAC valuations—and many trades businesses—get complicated.

Both owners work full-time in the business. They pay themselves $90,000 each ($180,000 combined). But SDE represents the earnings available to one full-time owner-operator. If a single buyer takes over, they can only fill one of those roles themselves.

The question becomes: which role does the buyer fill, and what does it cost to replace the other?

Market replacement costs:

• General Manager: $100,000 (requires industry experience, estimating skills, team leadership)
• Office Manager: $50,000 (scheduling, bookkeeping, admin oversight)

Most buyers would step into the GM role—it's higher value and harder to hire for. They'd hire an office manager at market rate.

The Compensation Premium

Notice something interesting: the owners pay themselves $180,000 combined, but market replacement for both roles is only $150,000.

The owners are taking $30,000 more than market rate. This isn't unusual—owners often pay themselves above market, especially in profitable businesses. It's their prerogative.

But for SDE purposes, this works in the buyer's favor. A buyer could hire both roles for $30,000 less than the current owners are paying themselves. That premium gets captured in the SDE calculation.

Discretionary Professional Expenses

Summit's owners are active in an HVAC industry peer group. They attend conferences, travel for industry events, and invest in professional development beyond required certifications.

These expenses total $52,000 annually:

• Meals, Entertainment & Travel: $40,000 (conferences, peer group meetings, industry events)
• Professional Development: $12,000 (elective training and seminars)

These are discretionary. A new owner might choose to participate in industry groups—or might not. Either way, they represent owner benefit that gets added back.

Standard Add-Backs

Beyond compensation and professional expenses, we add back:

Vehicle Expense ($15,000): Personal vehicle use run through the business.

Amortization ($35,000): Non-cash expense that gets added back.

Interest on Long-Term Debt ($5,500): Financing choices vary by buyer. Interest gets added back to show earnings before debt service.

Calculating Owner-Operator SDE

For a buyer who will work as GM and hire an office manager:

Net Income	$230,000
Add-Backs
+ Owner Salaries (Both)	$180,000
+ Vehicle Expense	$15,000
+ Meals, Entertainment & Travel	$40,000
+ Professional Development	$12,000
+ Amortization	$35,000
+ Interest on Debt	$5,500
Reductions
− Office Manager Replacement	$50,000
Owner-Operator SDE	$467,500

Here's the SDE across all four years:

Year	Net Income	Add-Backs	Reduction	SDE
Year 1 (Current)	$230,000	$287,500	$50,000	$467,500
Year 2	$220,000	$287,500	$50,000	$457,500
Year 3	$210,000	$287,500	$50,000	$447,500
Year 4	$200,000	$287,500	$50,000	$437,500

SDE grows in lockstep with net income—from $437,500 to $467,500 over four years. Consistent growth with no anomalies. This is a clean picture for buyers.

What These Numbers Tell Us

Several important observations:

The business throws off serious cash. Nearly $470,000 in owner benefit for Year 1. That's strong earning power that will command attention from qualified buyers.

Growth is consistent and sustainable. Revenue grew 23% over four years without wild swings. SDE followed proportionally. This isn't a business riding a one-time contract or unusual circumstance.

The team provides operational depth. With 12 employees, this isn't a one-man show. The business can operate without the owners handling every service call. That's valuable for transition and for absentee ownership potential.

Professional development is genuinely discretionary. The $52,000 in conferences, travel, and training represents owner choice, not business necessity. A buyer focused purely on profit could pocket this—though many would argue the industry relationships justify the expense.

What Comes Next

Calculating SDE is step one. In Part 2, we'll apply industry multiples to arrive at a valuation range—and show the significant difference between owner-operator and absentee buyer scenarios.

We'll also examine why HVAC businesses often command premium multiples compared to other trades, and what factors push Summit toward the higher end of that range.

Continue to Part 2: How to Value an HVAC Business: From SDE to Sale Price