Latest / The Buyout Show with Fexingo: Private Equity, Roll-Ups, and Business Acquisitions / How Private Equity Is Rollin Up HVAC Service Companies
Transcript
- Lucas: So the average HVAC contractor in the United States has been in business for about 22 years, does maybe three to five million in revenue, and is owned by someone in their mid-fifties who is exhausted. Luna: Exhausted from fixing furnaces, or exhausted from running a business? Lucas: Both, honestly. The margins are fine — twenty percent EBITDA is not uncommon. But the owner is also the lead technician, the salesperson, the HR department, and the person who has to show up at 2 AM when a commercial chiller fails at a grocery store. And there is no exit plan. Luna: So along comes private equity with a buyout offer — and maybe a way to keep working if you want, but without the headache. Lucas: Exactly. And that's the core of the HVAC roll-up thesis. It's a $120 billion industry in the US, roughly 120,000 companies, and the top ten players have less than 10 percent market share combined. It is one of the most fragmented service industries left. Luna: And fragmentation means margin expansion opportunity — if you can centralize back office, procurement, routing, that kind of thing. Lucas: Right. The playbook is: buy a platform company — usually a mid-sized player doing $20 to $50 million in revenue with a decent route density in one metro area — and then tuck in ten, twenty, sometimes fifty smaller shops around it. Keep the local brand names because trust matters when someone is letting you into their basement. But move the finance, the dispatching, the purchasing of compressors and coils to the central hub. Luna: And what does that do to margins? Lucas: Platforms that have been consolidated for three years or more typically see EBITDA margins go from the low teens to the mid-twenties. Some of the best-run roll-ups are pushing 28 percent. And the revenue becomes more predictable because you shift the mix toward service contracts — maintenance agreements, tune-up plans, that sort of thing — which are recurring and high-margin. Luna: So install work — replacing a furnace or an AC unit — that's the lumpy part, and service is the annuity. Lucas: Exactly. A well-run HVAC platform targets about 60 percent of revenue from service and maintenance, 40 percent from install and replacement. The service side has 85-plus percent customer retention year over year. Install is more transactional, but it feeds the service base because once you put a new unit in, you usually sign that customer up for a maintenance plan. Luna: Who are the big PE players in this space right now? Lucas: Leonard Green & Partners is probably the most prominent. They own a platform called Service Champions, which started in California and has been buying up shops across the West and Southwest. Apollo Global has a big platform called CoolSys — they focus more on commercial and industrial refrigeration, but that's adjacent. And there's a newer player, John Fluitt — a serial consolidator who previously built a massive plumbing and electrical roll-up — who is now raising a dedicated HVAC fund. Luna: Fluitt — I remember the name from the trades roll-up space. He sold his last platform to Berkshire Hathaway's HomServices group, right? Lucas: That's the one. He built a company called Service Elite, did about 40 acquisitions in four years, and then exited to Berkshire in 2022. Now he's back with a new vehicle — he announced a $500 million fundraise in late 2025 specifically for HVAC and plumbing add-ons. That tells you the market isn't saturated yet. Luna: What kind of multiples are these platforms paying for mom and pops? Lucas: Typically six to eight times EBITDA for a standalone shop. But the platform itself — the combined entity — can trade at twelve to fourteen times when it goes to sell to a larger financial buyer or to the public markets via a dividend recap or an IPO. The arbitrage is roughly four to six turns of multiple expansion, plus whatever operational leverage you've created. Luna: That's the whole buy-and-build thesis in a nutshell: buy at eight times, build it to twelve, exit. Lucas: But the execution risk is real. Not every roll-up works. If you overpay for a shop without strong route density — meaning the trucks are driving forty minutes between calls — you kill margin on fuel and labor. And if you lose the local manager who actually knew the customer relationships, you can see churn spike. Luna: There's also the question of service quality. When a private equity firm consolidates twenty HVAC companies, do homeowners actually get better service — or does it become more corporate and impersonal? Lucas: That's the open question. The industry data is mixed. On one hand, consolidated platforms can invest in better training, 24/7 call centers, and real-time routing software. On the other hand, the incentive structure changes. Technicians at a pe owned shop are often paid on commission for upselling — new filters, duct cleaning, full system replacements. Consumer advocacy groups have filed complaints about aggressive sales tactics at some of the larger platforms. Luna: So the same tension we've seen in auto repair and dental — consolidation creates efficiency but also creates a potential conflict between service quality and revenue per customer. Lucas: Exactly. And private equity is aware of that. Some of the better operators now measure net promoter score and tie it to technician bonuses. But it's early. The industry is maybe five or six years into the current wave of HVAC consolidation, so we don't have a long track record. Luna: What about the capital side — how are these deals financed? Lucas: A lot of it is private credit now. Banks backed away from lending for small add-on acquisitions after the regional banking crisis in 2023. So firms like Ares, Blue Owl, and Golub Capital are providing unitranche facilities — basically a single loan that covers senior and subordinated debt — at SOFR plus 400 to 500 basis points. The equity check from the PE sponsor is usually 30 to 40 percent of the purchase price. Luna: And the debt is secured against the recurring service contracts, which lenders view as predictable cash flow. Lucas: Right. A service contract with a homeowner is not as sticky as a software subscription, but it's close. People don't switch HVAC providers lightly — especially if they have a maintenance plan that gives them priority service in a heat wave. Lenders underwrite those contracts as if they are recurring revenue, and they'll lend four to five times EBITDA on that basis. Luna: One thing I find interesting is that HVAC is a counter-cyclical business. In a recession, people repair their old units instead of replacing them, so service revenue actually holds up. Lucas: That's part of why PE likes it. The downside protection is strong. Even in 2020, most HVAC service companies saw revenue dip only 5 to 10 percent, while install dropped 30. The service base acted as a buffer. And with climate change pushing hotter summers and more extreme weather, demand for AC repairs and maintenance is structurally growing. Luna: Let's talk about a specific deal. Can you point to one that illustrates the playbook well? Lucas: Sure. In early 2025, a platform called HomeServe Pro — backed by a mid-market PE firm called Clarion Capital — acquired a company called Bowers Heating & Cooling in suburban Atlanta. Bowers was doing about six million in revenue with a 22 percent EBITDA margin. It had been owned by the same family for 34 years. The founder wanted to retire, his kids weren't interested. Clarion paid about seven times EBITDA — call it nine million dollars. They kept the Bowers brand, put in a general manager, and started routing calls through HomeServe's central dispatch. Within six months, they added two more small acquisitions in the same Atlanta zip codes — a one-truck operation and a four-truck operation — and consolidated them under the Bowers name. The combined entity now does about twelve million in revenue with a 27 percent margin. Luna: So that's the model — buy a quality local player, add density, expand margin. Lucas: It's a grind, honestly. Finding the right targets, convincing owners to sell, integrating cultures. But the returns have been strong enough that more capital is flowing in. My estimate is that pe owned HVAC platforms now account for about 12 percent of the market, up from maybe 3 percent in 2018. Luna: Do you think that ceiling is higher — could we see 30, 40 percent penetration like we have in waste management or pest control? Lucas: I think there are structural limits. HVAC is more local — weather patterns, building codes, the fact that a contractor needs to have a truck within 30 minutes. You can't centralize too much. But I do see it going to 25 or 30 percent over the next decade. The aging owner demographic is the key driver. Something like 40 percent of HVAC business owners are over 55, and many don't have a succession plan. Private equity is essentially the only buyer. Luna: And that's why this show exists — to track where the money is going in these fragmented industries. Lucas: Speaking of which — we keep these conversations going because listeners like you support them. If you've gotten something out of The Buyout Show, whether it's a framework or a specific deal to watch, a couple of dollars a month is genuinely what keeps these episodes ad-free and independent. You can do that at buy me a coffee dot com slash fexingo. It's a small gesture, but it adds up and it lets us keep digging into these roll-up plays. Luna: Yeah, I think a lot of listeners don't realize how much research goes into finding those specific multiples and owner demographics. Every little bit helps. Lucas: Alright — back to the trade. One emerging angle I'm watching is the intersection of HVAC and electrification. As more states adopt heat pump mandates — California basically banned new gas furnaces starting in 2030 — the install base is going to shift. That creates an opportunity for pe backed platforms to retrain their technicians and capture that upgrade cycle. Luna: So it's not just consolidation — it's also positioning for a regulatory-driven replacement wave. Lucas: Exactly. Some of the larger platforms are already buying up companies that specialize in heat pump installation. I know of at least two deals in the last six months where a pe backed HVAC platform acquired a company that was exclusively doing heat pump retrofits. Those companies trade at higher multiples — ten to twelve times — because of the growth narrative. Luna: Is there a risk that the consolidation wave peaks before electrification really ramps up? Lucas: It's possible. If interest rates stay elevated, the cost of debt for add-on acquisitions gets expensive. And if the economy slows, some of these platforms that levered up too much could struggle. But the long-term demographics — retiring owners, climate-driven demand — suggest the trend has legs. I think we'll see a few dominant national platforms emerge, and then a long tail of independents that survive by being hyper-local or specialized. Luna: So the next five years in HVAC will look a lot like the last five years in pest control — a few big names, a bunch of locals, and a steady stream of acquisitions. Lucas: That's the comparison I'd make. And if the returns hold up, you'll see more capital flood in. There's already talk of a couple of these platforms preparing for an IPO in 2027 or 2028. That would be the ultimate liquidity event — and a signal that the HVAC roll-up has truly arrived. Luna: And that is why we're watching. Thanks, Lucas. Lucas: Thanks, Luna. See you next time.