In Part 1, we calculated SDE for Summit Mechanical Services across four years. Now we'll turn those earnings into a valuation range—and explore why HVAC businesses often attract premium multiples compared to other small businesses.
Quick Recap: The Numbers
Summit Mechanical is a 12-year-old HVAC company with two working owners and strong growth. Here's what we calculated:
| Year | Revenue | Owner-Op SDE |
|---|---|---|
| Year 1 (Current) | $2,950,000 | $467,500 |
| Year 2 | $2,750,000 | $457,500 |
| Year 3 | $2,550,000 | $447,500 |
| Year 4 | $2,400,000 | $437,500 |
A clean upward trend in both revenue and SDE. No anomaly years to explain away. This is the kind of trajectory buyers love to see.
Step 1: Calculate Weighted Averages
We weight recent years more heavily because they better predict future performance:
- Year 1 (most recent): 40% weight
- Year 2: 30% weight
- Year 3: 20% weight
- Year 4: 10% weight
| Metric | Calculation | Weighted Average |
|---|---|---|
| Revenue | ($2.95M × 40%) + ($2.75M × 30%) + ($2.55M × 20%) + ($2.4M × 10%) | $2,755,000 |
| SDE (Owner-Op) | ($467.5K × 40%) + ($457.5K × 30%) + ($447.5K × 20%) + ($437.5K × 10%) | $457,500 |
The weighting naturally favors the stronger recent years, pulling the average up toward current performance. For a growing business, this is appropriate—a buyer is purchasing future earnings, not historical ones.
Step 2: Apply Industry Multiples
HVAC businesses have established multiples based on actual transaction data:
- Base SDE Multiple: 2.72x
- Base Revenue Multiple: 0.58x
These multiples are higher than many service businesses for good reason: HVAC combines essential service demand, recurring revenue potential, skilled labor barriers, and favorable industry dynamics.
Step 3: Risk Factor Assessment
Five factors adjust the base multiples for business-specific characteristics:
| Factor | Summit Mechanical | Adjustment |
|---|---|---|
| Owner Involvement | Moderate (two owners + strong team) | 1.00x (no adjustment) |
| Financial Trend | Growing (23% over 4 years) | 1.05x (+5%) |
| Key Employees | Some (12-person team) | 1.00x (no adjustment) |
| Customer Concentration | Moderate (diversified residential/commercial) | 1.00x (no adjustment) |
| Books & Records | Adequate (organized financials) | 1.00x (no adjustment) |
Combined Adjustment: 1.00 × 1.05 × 1.00 × 1.00 × 1.00 = 1.05x (+5%)
Summit's growth trajectory earns a premium. The 23% revenue increase over four years demonstrates market demand, operational effectiveness, and momentum that buyers value.
Step 4: Calculate Adjusted Multiples
We apply the adjustment factor to both multiples:
| Multiple | Base | Adjustment | Adjusted |
|---|---|---|---|
| SDE Multiple | 2.72x | × 1.05 | 2.86x |
| Revenue Multiple | 0.58x | × 1.05 | 0.61x |
Step 5: Owner-Operator Valuation
An owner-operator buyer plans to step into the GM role and hire an office manager. They capture the full owner-operator SDE.
Dual-Metric Calculation
| Method | Base Value | Multiple | Valuation |
|---|---|---|---|
| SDE-Based | $457,500 | × 2.86 | $1,308,450 |
| Revenue-Based | $2,755,000 | × 0.61 | $1,680,550 |
Combined Value = ($1,308,450 × 70%) + ($1,680,550 × 30%) = $1,419,780
Owner-Operator Valuation Range
At $1.42M, a buyer is paying approximately 3.1x annual earnings. With owner involvement, they can expect to earn $457,500 per year—a strong return for a business that doesn't require the owner to turn wrenches.
Step 6: Absentee Owner Valuation
An absentee buyer won't work in the business. They need to hire both a GM and office manager to replace both departing owners.
For absentee scenarios, we deduct the GM salary from SDE before valuing:
Absentee SDE = Owner-Operator SDE − GM Salary ($100,000) = $357,500
Absentee Dual-Metric Calculation
| Method | Base Value | Multiple | Valuation |
|---|---|---|---|
| SDE-Based | $357,500 | × 2.86 | $1,022,450 |
| Revenue-Based | $2,755,000 | × 0.61 | $1,680,550 |
Combined Value = ($1,022,450 × 70%) + ($1,680,550 × 30%) = $1,219,880
Absentee Owner Valuation Range
An absentee buyer should pay approximately $200,000 less than an owner-operator. They're buying passive income rather than a job—valuable, but lower-earning.
Side-by-Side Comparison
| Component | Owner-Operator | Absentee Owner |
|---|---|---|
| Weighted SDE | $457,500 | $357,500 |
| SDE Valuation (70%) | $1,308,450 | $1,022,450 |
| Revenue Valuation (30%) | $1,680,550 | $1,680,550 |
| Midpoint Value | $1,420,000 | $1,220,000 |
The $200,000 difference represents the cost of not working. For a buyer seeking truly passive HVAC income, that premium may be acceptable—$357,500 in annual earnings from a well-run operation with a strong team is attractive.
Why HVAC Commands Premium Multiples
Several factors drive HVAC businesses to the higher end of small business valuations:
Essential service. Heating and cooling aren't optional. When a furnace fails in January or an AC dies in August, customers call immediately. This creates recession-resistant demand.
Recurring revenue potential. Maintenance contracts, seasonal tune-ups, and filter subscriptions create predictable income streams. Summit doesn't have a large maintenance contract base yet, but the infrastructure exists to build one.
Skilled labor moat. HVAC technicians require years of training and certification. You can't staff an HVAC company with general laborers. This barrier to entry protects established players.
Aging infrastructure. Residential and commercial HVAC systems need replacement every 15-20 years. As housing stock ages, replacement demand grows regardless of economic conditions.
Fragmented market. Most HVAC companies are small and local. Private equity and larger players actively acquire in this space, creating a healthy buyer pool.
The Growth Premium
Summit's 23% revenue growth over four years deserves attention. Many buyers will pay more for growth than the standard multiple suggests.
Consider: if the growth trend continues, Year 2 under new ownership could see SDE of $480,000+. A buyer paying 3.1x on current earnings is effectively paying 2.9x on projected future earnings.
Growth businesses attract competitive offers. Summit would likely see multiple interested buyers, potentially pushing the final price toward the higher end of the range—or beyond it.
What About Equipment and Vehicles?
HVAC businesses typically include significant rolling stock—service vehicles, specialized tools, diagnostic equipment. Unlike inventory (which gets added at cost), equipment value is generally captured within the SDE-based valuation.
The logic: the business couldn't generate its earnings without the equipment. The equipment enables the SDE. A buyer purchasing the business expects to receive the equipment needed to operate it.
Equipment value becomes relevant as a floor: if fair market value of trucks and equipment exceeds the SDE-based valuation, a seller might argue for the higher number. But for a business earning $457,500 annually, equipment rarely exceeds business value.
Key Takeaways
Dual metrics provide complete picture. The 70% SDE / 30% revenue weighting prioritizes earnings while incorporating scale. Revenue valuation is higher because it captures Summit's $2.75M market presence.
Owner-operator vs. absentee matters significantly. The $200,000 difference isn't arbitrary—it represents the actual cost of hiring a GM to replace an involved owner.
Growth commands premiums. The 5% adjustment for growth trajectory adds approximately $65,000 to valuation. Consistent growth signals market demand and operational effectiveness.
HVAC multiples reflect industry fundamentals. The 2.72x base SDE multiple (before adjustments) represents actual transaction data showing what buyers pay for HVAC businesses.
Summit Mechanical Services represents a well-positioned HVAC acquisition. Strong fundamentals, growth trajectory, and operational depth justify pricing toward the higher end of the range. An owner-operator buyer should expect to pay $1.3M-$1.5M. An absentee investor seeking passive income should target $1.1M-$1.3M.
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