Latest / The Buyout Show with Fexingo: Private Equity, Roll-Ups, and Business Acquisitions / How Private Equity Is Rolling Up Commercial HVAC Services
Transcript
- Lucas: So there's this one stat that's been stuck in my head for weeks. Roughly 82 percent of the commercial HVAC service market in the US is still owned by independent operators — small shops, family-run businesses, often with fewer than 20 employees. Luna: And that's exactly the kind of number that gets private equity firms salivating. Lucas: Exactly. Because what you have is a $50 billion industry — actually closer to $55 billion now — that's highly fragmented, recession-resistant, and built on recurring service contracts. Air conditioners break in July, furnaces fail in January. That's not cyclical demand, that's just physics. Luna: So who's the biggest player right now? Is there a national brand emerging? Lucas: There isn't one dominant national player yet — and that's kind of the point. The largest pure-play commercial HVAC service company I've seen is probably Service Logic, which is backed by GI Partners. They've done around 70 acquisitions since 2017. But even they probably have less than 5 percent national market share. Luna: So it's still a scramble. Everyone's trying to build the platform. Lucas: Right. And the playbook is pretty standard by now in PE. You find a strong regional operator — maybe $10 to $15 million in EBITDA — you buy it at 8 to 10 times, and then you bolt on smaller shops at 5 to 7 times. Each add-on brings a book of service contracts, a crew of licensed technicians, and a branch in a new territory. Luna: What makes HVAC more attractive than, say, rolling up roofing companies or landscapers? Lucas: The recurring revenue piece is the big differentiator. A commercial HVAC service contract typically renews annually. We're talking about 85 to 90 percent gross retention rates on those contracts. So once you've got the customer, they're sticky. Changing a service provider means shutting down the building's HVAC for an audit — nobody wants to do that. Lucas: Compare that to roofing, where the revenue is project-based. You put a roof on and you won't see that customer again for 15 years. HVAC services throw off cash flow every single month. Luna: So the financial profile looks a lot like an insurance brokerage — steady, predictable, with low customer churn. Lucas: Exactly. And that's why you're seeing PE firms like GI Partners, Alpine Investors, and Audax Group all piling in. They're not looking for fast growth; they want to compound that cash flow over 5 to 7 years and then exit to a larger sponsor or even a strategic buyer. Luna: Let me push back a little though. Does consolidation actually improve service for the end customer? Because I've heard horror stories about these roll-ups — central dispatch, longer wait times, losing the local touch. Lucas: It's a fair point. The theory is that a larger company can offer better training, volume pricing on parts, and a bigger on-call roster. In practice, it depends entirely on how the platform handles integration. If they rip out the local owner and replace them with a corporate general manager who doesn't know the market, service quality can definitely slip. Lucas: But I've also seen cases where the roll-up actually improves response times because the platform can pool technicians across branches. A shop that used to have three trucks on the road now has twelve. Luna: So it's a mixed bag. Probably depends on the specific deal team and their operational playbook. Lucas: Yeah. And to be fair, most of these firms are aware of the risk. The good ones keep the local brand name and let the original owner stay on as a regional manager with an earn-out. They don't want to kill the golden goose. Luna: What kind of multiples are we seeing for the smaller add-on targets? The mom and pop shops. Lucas: Typically 5 to 7 times EBITDA for a shop doing $1 to $3 million in EBITDA. The smaller they are, the lower the multiple — because there's more owner-operator risk. If the founder retires, you might lose relationships. So PE firms pay a discount and then try to retain that owner for a transition period. Lucas: For the larger platform deals, I've seen multiples push into the low double digits. Service Logic's last acquisition was reportedly at about 11 times. But that's for a company with scale, management depth, and a real track record. Luna: And the exit? Who buys these platforms when it's time to sell? Lucas: A few paths. Another, larger PE firm is the most common — a secondary buyout. Sometimes a strategic like a facility management company — think CBRE or JLL — could acquire one to bring HVAC in-house. And there's always the possibility of an IPO, though that's less likely given the size of these platforms right now. Luna: Interesting. So the endgame is basically the same as every other roll-up: build it, prove the model, and hand it off to a bigger buyer. Lucas: Pretty much. And that brings me to something I wanted to mention. If these conversations have moved your work forward in some small way, we keep this show ad-free thanks to listener support. People can find us at buy me a coffee dot com slash fexingo. No pressure, just wanted to flag it. Luna: Yeah, it really helps us keep digging into these niches. Appreciate everyone who chipped in. Lucas: So back to HVAC. One of the more interesting deals I've seen recently is a platform called Service Logic. They started in 2017 with a single company in Pittsburgh. Seven years and 70 acquisitions later, they're in 25 states, doing north of $800 million in revenue. Luna: That's a lot of deals. How do they find so many targets? Lucas: They've got a dedicated M&A team that cold-calls independent shops. But the real funnel is referrals. When they buy a shop, the owner often knows other owners in the region — same trade association, same supply chain. One acquisition leads to three more leads. Luna: And what's the typical size of those add-ons? Lucas: Most are doing $2 to $5 million in revenue, with maybe $500,000 to $1.5 million in EBITDA. Small enough that they don't need a big integration team, but large enough to move the needle when you add them up. Lucas: The interesting thing is that these shops often have zero formal financial reporting. The books are just QuickBooks and a shoebox of receipts. So part of the PE playbook is professionalizing the back office — putting in an ERP system, standardized P&Ls, monthly reporting. Luna: That must create a lot of operational lift. Not every PE firm has that capability in-house. Lucas: True. And that's why you see specialist firms like Alpine Investors, which has an internal operations team called 'Alpine Ops' that handles exactly this. They send in a controller and a process engineer for the first 90 days post-close. Luna: So the value creation isn't just in the multiple arbitrage — buying low and selling high. It's also in improving margins through better management. Lucas: Exactly. The typical independent shop runs at 8 to 12 percent EBITDA margins. A well-run platform can push that to 15 to 18 percent, just by centralizing purchasing, optimizing routes, and cross-selling service contracts to existing customers. Luna: What about the risk of overpaying? We're in June 2026, interest rates are still elevated — 10-year Treasury around 4.5 percent. Does that cool off the dealmaking? Lucas: It definitely makes the math harder. Debt is more expensive, so equity needs to work harder. But the sponsors I talk to say they're still finding good deals because the fragmentation is so extreme. There aren't that many buyers for a $3 million EBITDA HVAC shop. Strategic acquirers don't want that small a deal, and most PE funds won't look at anything under $10 million. So the smaller shops still trade at a discount. Luna: Right, so the roll-up play works because the small guys are undervalued relative to the combined entity. Lucas: Exactly. And the recession resistance is the cherry on top. In a downturn, companies delay capital projects — new HVAC installations get pushed — but they can't delay repairing a broken chiller in July. Service revenue holds up. Luna: So what's the one thing a listener should take away from this episode? Lucas: I think it's that the most unglamorous industries often hide the best risk-adjusted returns. Commercial HVAC is not flashy. But when you look at the unit economics — 90 percent retention, 15 percent EBITDA margins, low CapEx — it's a cash flow machine. And the consolidation wave is still in its early innings. Luna: I'd add that for any small business owner listening who runs a service company, now might be a good time to get your books in order. The buyers are out there, and they're paying premiums for clean financials. Lucas: Great point. Alright, that's the buyout show for this week. Next episode we're looking at how private equity is rolling up something you probably use every day — commercial laundry services. Luna: Can't wait. See you next time.