The HVAC Recast: When the Seller's Number and Your Number Are $2.5 Million Apart
Your listing presentation for a 22-year-old residential HVAC company has to reconcile two very different numbers. The founder reports trailing-twelve-month revenue of $3.1 million and 'seller's discretionary earnings' of $840,000. He wants to list at $4.2 million, roughly 5.0x, citing two competitor sales he heard about at a trade show. Your draft recast tells a different story. His total compensation is $150,000, but the role requires a general manager who would cost $190,000 including payroll taxes. The P&L includes $62,000 of personal vehicle and life insurance expense, $48,000 paid to two adult children who do not work in the business, and $120,000 of forgiven PPP funds booked as income. Capital expenditures averaged $84,000 per year across the period and were largely deferred in the last twelve months. One commercial account representing 21% of revenue has given 60-day notice. Comparable HVAC businesses have sold at 2.5x to 3.5x adjusted SDE, with customer concentration above 20% pushing toward the low end.
1. Build the adjusted SDE and the supportable value range, showing each adjustment and why it belongs or does not.
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Adjusted SDE build-up:
| Item | Amount |
|---|---|
| Seller's stated SDE | $840,000 |
| Less GM replacement shortfall ($190,000 − $150,000) | ($40,000) |
| Less personal vehicle and life insurance | ($62,000) |
| Less non-working family payroll | ($48,000) |
| Less forgiven PPP income (non-recurring) | ($120,000) |
| Adjusted SDE | $570,000 |
Why each belongs. A buyer must hire a GM at market, so the seller's below-market compensation understates the true cost of running the business - a negative adjustment. Personal vehicle and life insurance are owner benefits with no operating purpose, so they are added back to the seller's benefit, not deducted; here they are already inside the $840,000 as expenses, so they come out of SDE only if the seller is claiming them as add-backs. Prepare the schedule so both directions are explicit and the buyer can audit it. The family payroll is only an add-back if the children genuinely perform no services - document that, because buyers and lenders will ask. PPP forgiveness is a one-time event and never belongs in recurring earnings.
Then handle capex separately. Capex is not an SDE line item, but a buyer underwrites cash flow after capex. $570,000 − $84,000 = about $486,000 of pre-debt cash flow. The deferral in the last twelve months means the buyer faces a catch-up year; disclose it and let it inform the multiple.
Value. At 2.5x–3.5x adjusted SDE the range is roughly $1.43 million to $2.0 million. The 21% customer already gone should push toward the bottom and arguably below it, because the trailing revenue does not yet reflect the loss. A defensible asking price is around $1.6 million to $1.9 million, not $4.2 million.
2. The seller insists on $4.2 million and says he will find a broker who will list it there. How do you handle the conversation and what do you put in writing?
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Separate the person from the number. He is not lying; he is anchoring on trade-show anecdotes with no adjustment for size, customer concentration, capex, or the departing account. Your job is to make the gap explainable, not to win an argument.
Do this in the meeting:
- Walk the recast line by line with the actual P&L in front of him. Let him correct any adjustment he thinks is wrong - some may be. Brokers get recasts wrong too, and the credibility you gain from conceding a point is worth more than the point.
- Show the buyer's math, not yours: at $4.2 million the buyer is paying 7.4x adjusted SDE. Ask what a buyer would have to believe to do that - that the lost 21% account comes back, that capex stays deferred forever, and that a GM costs nothing. None of those survive due diligence.
- Explain the market consequence of overpricing: stale listings, price reductions that signal distress, buyers who assume something is hidden. An overpriced listing does not fail loudly; it fails quietly over eight months.
Put this in writing: a pricing memo in the file recording the adjusted SDE, the comparable range, the recommended list price, and the seller's instruction to list higher. If you take the listing at his number, use a price-reduction schedule in the engagement letter - for example, automatic step-downs at 45 and 90 days absent an accepted offer - so the decision to reprice is made now, calmly, rather than later under pressure.
And be willing to decline. An overpriced listing you cannot sell costs you the marketing budget, the seller's goodwill, and the referral he would have given you. Saying no with a documented pricing analysis often earns the listing later at your number.
3. What should the engagement letter and the CIM disclose about the departing customer and the deferred capex, and why does that matter commercially?
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Disclose both, in the CIM, in plain language, early. The instinct to bury a 21% customer loss in the data room is the single most common way a business broker creates a lawsuit and a failed closing.
On the customer: the CIM should state that one commercial account represented approximately 21% of trailing revenue, that it has given notice of non-renewal effective in 60 days, and what the seller is doing about it - replacement pipeline, contract terms on remaining accounts, whether the account is replaceable at all. Buyers price known problems; they blow up deals over discovered ones. If the loss surfaces at day 40 of due diligence, the buyer's lender re-underwrites, the SBA eligibility analysis changes, and the seller loses all credibility on everything else in the document. If it is disclosed at day one, the buyer bids lower but bids.
On capex: state average capex of $84,000 annually, note the deferral in the last twelve months, and quantify the deferred maintenance so the buyer can size the catch-up. Lenders will require this for a 7(a) loan. A buyer who discovers a $200,000 equipment backlog after signing will demand an escrow or a price cut several times larger than the actual cost.
Engagement letter terms that protect both sides: seller's written representation that all financial and customer information provided is complete and accurate, an obligation to update the CIM if circumstances change, your right to correct or withdraw the CIM, and a clause confirming that the seller approves the final document. Also confirm in writing that the recast is a marketing document, not an audit or a valuation, and that buyers must do their own verification.
Commercially, disclosure lowers your price and raises your closing rate. That trade is almost always worth it.