Buying an HVAC, Plumbing or Home Services Business with an SBA Loan

Why trades businesses are popular, and where they trip up

HVAC, plumbing, electrical, roofing, pest control, garage doors: home and commercial service businesses are attractive to buyers because demand is steady, the work can’t be offshored, and many owners are approaching retirement with no family successor. Lenders like the category too, because these businesses often have years of tax returns, real equipment and a broad customer base.

They trip up on a short list of issues that are specific to the trades. This page covers those. For the general mechanics of an acquisition loan, see buying a business with an SBA loan.

The license holder

Many trades require a licensed master or qualifier for the business to pull permits and do the work. Licensing is set by states and often by municipalities, so the rules vary from place to place. The question for your deal is simple: whose license does the business operate under, and will it still have one the day after closing?

• If you hold the right license, say so prominently in your loan request.
• If a long-time employee holds it, the lender will want to know that person is staying, and may look at how the business would cope if they left.
• If the seller holds it, you have a problem to solve before closing: get licensed yourself, hire a licensed qualifier, or arrange a transition the rules allow. The seller’s role after closing is limited under SBA rules (see below), so “the seller will keep his license on the business for a few years” is not a plan a lender can rely on without checking.

Seasonality and the payment

An HVAC company may do much of its business in the hottest and coldest months; a landscaper or pool company is quieter in winter. Annual cash flow can look comfortable while two or three months run short.

Lenders look at monthly or quarterly results, and their analysis includes whether the business will have enough working capital to get through the next year. Practical answers include building a working-capital reserve into the project at closing, setting up a line of credit, and, with some lenders, discussing a payment structure that fits the cycle. Working capital in a business acquisition covers how a reserve is sized and funded.

Technicians and the customer relationship

In a service business, customers often know the technician better than the owner. Lenders and buyers both ask:

• How many technicians are there, how long have they been with the company, and are any of them likely to leave or compete?
• Are there non-solicitation or similar agreements, and are they enforceable where you are?
• Who are the customers loyal to: the brand, the service agreement, or a particular person?

A transition plan that keeps the key technicians, sometimes with a retention bonus funded by the buyer, can matter as much as the price.

Recurring revenue and customer concentration

Not all revenue is equal:

• Maintenance and service agreements that renew year after year are the most valuable. Bring the renewal history.
• Repair and replacement revenue from a broad residential base is steady in aggregate.
• New construction or a few commercial contractors can be lumpy and concentrated. If one general contractor accounts for a big share of revenue, expect questions about that relationship and its terms.

The lender’s valuation and, on larger deals, a quality-of-earnings report look at revenue quality and customer concentration as well as the totals. For initial acquisitions with a purchase price of $3 million or more, the current SBA rulebook requires a quality-of-earnings report in addition to the business valuation.

Add-backs and deductions specific to the trades

Common add-backs: the seller’s personal truck and fuel, family members on payroll who won’t stay, a one-time lawsuit or equipment failure, depreciation and interest. Common deductions: a market salary for the owner-operator, and truck and equipment replacement. A fleet that needs replacing is a real recurring cost even if the seller hasn’t been doing it. Under the current rules, lenders adjust cash flow for unfunded capital expenditures and owner compensation, and must justify each adjustment. See add-backs for the general principles.

Vehicles, equipment and collateral

Trucks, tools and inventory are part of what you’re buying, and they become collateral for the loan. For collateral purposes, used equipment counts for only part of its value, so in most trades acquisitions the business assets won’t fully cover the loan. When there’s a shortfall, lenders look to other available collateral, which can include equity in personal real estate. That’s common in goodwill-heavy deals, so expect the conversation early rather than at commitment. If vehicles are leased, the leases have to be assigned or replaced.

The seller’s role after closing

In an SBA-financed purchase of 100% of the business, the seller can’t stay on as an owner, officer or employee, but the business may hire the seller as a consultant for a transition period of up to 24 months in total. For a trades business, use that period to introduce yourself to commercial accounts, transfer supplier and manufacturer relationships, and settle the license question for good. More in the seller transition period.

Before you sign the letter of intent

1. Whose license does the business operate under, and what’s the replacement plan?
2. What do the monthly results look like for the last two or three years?
3. What share of revenue is from service agreements, and what’s the renewal history?
4. Who are the top customers, and what share of revenue does each represent?
5. What does the fleet look like, and what needs replacing soon?
6. Which technicians are staying, and on what terms?

Run your numbers in the acquisition calculator, read how business acquisition financing is structured, and when you’re ready, tell us about the deal. We’ll tell you where it looks solid and where a lender is likely to push.