Latest / The Buyer & Seller Podcast with Fexingo: Business Brokers, Exits, and Private Sales Explained / How a Commercial HVAC Firm Hit 22x EBITDA with Service Contracts
Transcript
- Lucas: Luna, I want to run a valuation puzzle by you. A commercial HVAC company in Phoenix — 40 employees, mostly doing repair and replacement for office buildings. Typical small business, owner works 60 hours a week. They sell for 22 times EBITDA. How do you get there? Luna: 22 times? That's not a trades business multiple — that's SaaS territory. Let me guess: they rebuilt the revenue model around recurring contracts? Lucas: Exactly. This company three years before the sale had maybe 15 percent of revenue from preventive maintenance agreements. The rest was break-fix — someone's AC goes down in July, they call, you bill time and materials. The owner finally realized that business is worth half what a contract business is worth, and he had two years to change it. Luna: Two years is tight. How did he pull it off? Lucas: He hired one salesperson — just one — whose only job was selling annual maintenance agreements to existing customers. No cold calling. He gave them a list of every commercial property they'd worked on in the past three years, and said 'go back and sell them a contract.' First year, they converted about 30 percent of that list. Second year, they got another 20 percent. By the time they listed the business, recurring revenue was 80 percent of total revenue. Luna: So what did those contracts look like? Were they just 'we'll show up once a year' or something more? Lucas: Two visits per year — spring and fall — for filter changes, coil cleaning, refrigerant level checks, belt inspections. The standard package was about $2,400 per rooftop unit annually. They also offered a premium tier with priority dispatch and a 10 percent discount on any repairs. That premium tier was $3,600 per unit. About 40 percent of customers chose premium. Luna: And the retention rate on those? Lucas: 94 percent annually. Once you have a maintenance contract on a commercial HVAC system, the property manager does not want to switch. It's a pain. And the equipment is critical — tenants complain if it's 95 degrees. So churn is naturally low, which is exactly what buyers love. Luna: So the multiple reflects that stickiness. 22x on 1.2 million of EBITDA — that's a $26.4 million valuation for a company that was probably worth 8 or 9x before the shift. Lucas: You did the math quickly. The owner told me they had two private equity groups bidding. Both were doing roll-up strategies in the mechanical services space — they wanted this company as a platform because the recurring base gave them predictable cash flow to layer on acquisitions. The winning buyer paid 22x because they could immediately add their own customers to the same contract model. Luna: It's the reusability. The buyer isn't just buying the existing contracts; they're buying a proven sales process and a customer base that's trained to pay monthly. That's worth more than the revenue itself. Lucas: Right. And that's the lesson for any trades business — HVAC, plumbing, electrical, pest control, landscaping. The multiple expansion from shifting to recurring is usually 2 to 3 times what you'd get on a break-fix model. But it takes execution. The owner in Phoenix told me the hardest part was the first six months, when the salesperson was earning commission but not yet covering their own salary. Luna: How did they handle that? Cash flow must have been tight. Lucas: They funded it out of the owner's salary. He took a pay cut for 18 months. He said it was the best investment he ever made. And he also changed how they billed — instead of invoicing after each repair, they moved customers to monthly auto-pay for the contracts. That smoothed cash flow dramatically. By year two, the contracts were covering all fixed costs. Luna: So the owner essentially transformed his business into something a PE firm could understand and value on a multiple of earnings, not a multiple of owner effort. That's the whole game, isn't it? Lucas: That's exactly the game. And it's worth noting that this company wasn't some high-tech marvel. It was ductwork and compressors. But the revenue model made it look like a software company to the buyer. The multiple went from single digits to 22x. That's a 150 percent valuation increase from a business model change. Luna: I want to ask about the contract terms. Were they one-year auto-renew? Or multi-year? Lucas: Mostly one-year auto-renew, with a 30-day cancellation clause. The buyer liked that because it meant they could re-price annually. In 2024 and 2025, they raised rates by about 6 percent each year and lost almost no customers. When you're providing a critical service and you have a relationship with the facility manager, a modest price increase doesn't drive churn. Luna: So the contracts themselves are a pricing lever. And that's another reason for the multiple. Lucas: Exactly. And speaking of multiples, I've mentioned before how listener support keeps this show ad-free and independent. If these conversations have moved your work forward in some small way, a couple of dollars a month is genuinely what keeps them going — buy me a coffee dot com slash fexingo, if you've gotten something out of them. Luna: Yeah, it really does make a difference. And we don't run ads, so it's the only way the show stays sustainable. Lucas: So back to the HVAC deal — the other interesting angle is how they structured the earn-out. The owner stayed for two years post-sale, and 30 percent of his consideration was tied to hitting contract retention and cross-sell targets. Luna: That's smart. It aligns incentives. If the buyer screws up the service quality, they're the ones who lose on the earn-out too. Lucas: Right. And the targets were reasonable: maintain 90 percent retention, and sell at least one additional service — like duct cleaning or building automation — to 15 percent of the contract base each year. The owner hit both in year one and was on track in year two when I spoke to him. He said the earn-out paid out about $1.2 million. Luna: So total consideration north of $27 million. For a company that three years earlier was just a guy with a truck and a tool belt. Lucas: It really is a testament to how much the business model matters more than the industry. The same story plays out in plumbing, electrical, even commercial cleaning. If you can package your service into a recurring subscription, you change the conversation with buyers. Luna: And for the owner considering selling in the next few years, what's the first step? Before they even talk to a broker. Lucas: Audit your revenue mix. Take your last 12 months of revenue and categorize it: what percentage came from one-time service calls versus recurring contracts versus emergency after-hours calls. If recurring is under 50 percent, you have a two-year project ahead. Start with your best, most loyal customers. Offer them a contract at a slight discount. Prove the model works on 20 accounts, then scale. Luna: And track retention religiously. Because a buyer will ask for that number on day one. Lucas: Absolutely. The Phoenix HVAC company had a spreadsheet with every contract, start date, renewal date, and whether they retained or lost it. That level of detail signals to a buyer that this isn't accidental — it's managed. Luna: Alright, so let's say someone listening runs a trades business and wants to try this. What's the biggest mistake they should avoid? Lucas: Underpricing the contract. A lot of owners think they need to offer a huge discount to get people to switch from break-fix. But the value of a contract isn't just the two visits — it's priority service, predictable budgeting, and no emergency markup. If you price too low, you train customers that your service is cheap, and then you can't raise prices later. The Phoenix company priced their contract at about 80 percent of what a typical year of break-fix cost for that customer. Not a steal, just a fair deal. Luna: That makes sense. You want the customer to feel like they're getting a good value, but not so good that you're leaving money on the table. Lucas: Exactly. And one more thing — the owner told me the single best decision was hiring a dedicated contract salesperson. Not a technician trying to sell on the side. A real salesperson with a quota and commission. That person generated $400,000 in new annual contract revenue in year one. The cost was $70,000 in salary and commission. That's a 6-to-1 return. Luna: Hard to argue with those numbers. And now that company is part of a larger platform, probably doing multiple acquisitions. The legacy is a well-run business that got the model right. Lucas: That's the goal for any business owner thinking about exit. Build something that works without you, with predictable cash flow, and the buyers will find you. The multiples will follow.