In the world of HVAC business acquisitions, a common question buyers like to smugly ask is, “How many maintenance agreements do you have in place?” It’s a question often fueled by industry ‘gurus’ who emphasize the importance of having monthly recurring revenue streams to make a business more valuable. But do maintenance agreements really add value, or is this just another checkbox for buyers to feel more secure?
The truth is, maintenance agreements don’t automatically make an HVAC business more valuable. Sure, they offer a stable form of income, but ultimately, HVAC businesses are valued based on profitability metrics like Seller’s Discretionary Earnings (SDE) and EBITDA. These numbers reflect the true health of a business far more accurately than the number of maintenance contracts you have on the books. If your business is already generating healthy profits without relying on maintenance agreements, there’s no immediate need to overhaul your model just to chase after them.
The Profitability Factor
It’s important to remember that when buyers or brokers are valuing your HVAC business, they look at your profitability first and foremost. Metrics like SDE and EBITDA give a clear picture of how much cash flow the business generates, which directly affects how much a buyer is willing to pay.
If your business can maintain strong numbers in terms of revenue, margins, and profitability without maintenance agreements, that’s great. There’s no reason to feel like you’re losing value just because you don’t have recurring monthly revenue from maintenance contracts. Some of the best-performing HVAC businesses don’t rely on them and instead focus on delivering high-quality services with strong customer retention through other means.
The Potential Upside of Maintenance Agreements
Now, that’s not to say that maintenance agreements can’t provide value—indirectly. Businesses that do have a solid base of maintenance contracts often see benefits in other areas. For example, recurring agreements can help smooth out cash flow during slower months, stabilize revenue, and increase customer loyalty. Companies that capitalize on these agreements may also report better margins and higher overall revenue, which ultimately boosts profitability metrics like SDE and EBITDA.
Additionally, maintenance agreements can lead to upsell opportunities. If a technician spots an issue during routine maintenance, they can easily turn it into a larger job, driving additional revenue. This creates a more consistent flow of work, which can lead to higher profits over time. But even with all these potential benefits, it’s important to understand that these agreements alone aren’t the golden ticket to a higher valuation.
Should You Add Maintenance Agreements Just to Sell?
If your business doesn’t currently offer maintenance agreements, there’s no sense in rushing to implement them just because you’re preparing to sell. Many buyers may inquire about these contracts, but at the end of the day, they’ll still evaluate your business on its core profitability metrics. Adding maintenance agreements at the last minute may not have the positive impact you expect—especially if it’s not something your business has historically relied on.
Moreover, poorly executed maintenance contracts can become a liability rather than an asset. If your team isn’t set up to efficiently manage recurring service calls or if you’re not pricing the agreements properly, they could actually hurt your margins rather than help them. So, unless you’re prepared to integrate them into your business model in a meaningful way, it’s better to focus on what your business already does well.