HVAC Business Valuation Considerations
Beyond Heating and Cooling
From coast to coast and everywhere in between, HVAC plays a critical role in economic performance and presents compelling opportunities. This article discusses factors business valuators must consider when they are engaged to value HVAC companies.
Heating, ventilation, and air conditioning (HVAC) services are not only essential, they are foundational to modern comfort and thriving businesses. The history of HVAC is rich with innovation, and so is the craft of valuing HVAC companies. From coast to coast and everywhere in between, HVAC plays a critical role in economic performance and presents compelling opportunities whether you are launching a startup, expanding operations, or exploring strategic investments.
Surprisingly, the roots of modern HVAC stretch back thousands of years. Ancient Egyptians cooled their homes by hanging wet reeds in windows to chill incoming breezes. In Iron Age Korea, the Ondol system used a furnace, buried flues, and heated stones to warm living spaces. In the Middle East, windcatchers (towering structures designed to channel cool air into buildings) showcase early passive cooling techniques. By the third century, the Chinese had developed windmill fans, even incorporating water wheels for energy. Meanwhile, Greeks and Romans engineered heating systems that pushed warm air through channels beneath marble floors.[1]
The Industrial Revolution accelerated these advancements. In 1742, Benjamin Franklin developed a cast iron furnace to distribute heat, while just a few years later, William Cullen of Glasgow created the first recorded instance of artificial refrigeration in a lab. But it was not until 1902 that modern air conditioning truly began to take shape, when Willis Carrier invented the first practical air conditioning unit; forever transforming how we live, work, and build.
Today, HVAC businesses are not just vital, they are valuable. With a legacy of invention and a future full of opportunity, they remain a smart bet for investors and entrepreneurs alike.
According to Grand View Research, the U.S. HVAC systems market was valued at $30.41 billion in 2023 and is projected to grow at a compounded annual growth rate (CAGR) of 7.4% from 2024 to 2030. This growth is fueled by rising global temperatures, shifting weather patterns, and a growing emphasis on energy-efficient and sustainable building practices. HVAC systems—essential for maintaining comfort and indoor air quality—are widely used across residential, commercial, and industrial buildings. In the U.S. alone, the Air Conditioning Contractors of America (ACCA) report that approximately 2–3 million heating and cooling systems are replaced yearly, contributing to an annual spend of over $14 billion on HVAC services and repairs. Given that heating and cooling typically account for about half of a home’s total energy usage, efficient systems are critical for both household savings and national energy conservation efforts.
The sector’s momentum is further supported by rising demand for energy-efficient equipment, a booming real estate market, and government incentives promoting low-power consumption and renewable energy adoption. Tax credits covering 20% to 30% of installation costs for qualifying energy-efficient HVAC products have created a favorable environment for both consumers and manufacturers.
In addition to new installations, ongoing repair and maintenance activities represent a growing revenue stream; especially for Original Equipment Manufacturers (OEMs). With over $10 billion spent annually on HVAC maintenance, there is increasing demand for services like regular cleanings, component replacements (e.g., motors, filters, and coolants), and system upgrades. Standardization in manufacturing and tighter regulations on energy efficiency are also helping reduce the industry’s environmental impact, making HVAC a sector with strong prospects for sustainable growth.[2]
What is the Process for Valuing an HVAC Business?
The valuation process depends in part on the intended purpose. For instance, a valuation conducted for Small Business Administration (SBA) financing may be structured as an asset purchase, which involves different adjustments and considerations than a stock purchase. Likewise, valuations for gift or estate tax planning often require additional considerations, including the application of appropriate discounts for lack of control or marketability.
Assuming the use of the fair market value standard and a going concern premise, the most common and reliable approaches to valuing an HVAC business are the income approach and the market approach. While the asset-based approach should still be reviewed, it is typically less reflective of an operating business’s true value. This is because the asset approach focuses on tangible assets and may undervalue the company’s earning power.
In contrast, the income approach captures the business’s ability to generate future cash flows, providing a comprehensive view of value that includes both tangible and intangible assets. The market approach, which compares the subject business to similar companies that have been sold or publicly traded, offers additional insight into market-based pricing. Together, these methodologies provide a balanced and practical framework for determining the value of an HVAC company operating as a going concern.
When valuing HVAC businesses, both operational and financial key performance indicators (KPIs) are essential for evaluating performance, identifying trends, and supporting valuation conclusions. Monitoring these metrics allows the valuation professional to pinpoint key value drivers and either develop independent forecasts or assess the reasonableness of the client’s assumptions and projections.
When valuing an HVAC business, tracking key operational and financial metrics is critical to understanding performance and identifying value drivers. Operationally, revenue per technician or installer is a useful measure of field staff productivity and helps normalize staffing levels across companies. Similarly, the average revenue generated per service call or installation offers insights into pricing strategy and the company’s ability to upsell. The service vs. install revenue mix, which compares recurring service and maintenance revenue to one-time installation jobs, is also important as service work typically carries higher margins and more predictable cash flow. Customer retention rates are particularly relevant for companies offering maintenance contracts, with higher retention reflecting greater revenue stability and long-term cash flow visibility.
On the financial side, customer acquisition cost (CAC) helps assess the efficiency of marketing spend in relation to business growth, while customer lifetime value (LTV) becomes especially meaningful when the business generates consistent service contract revenue. Additionally, accounts receivable days—a measure of how quickly the company collects payments—plays a key role in evaluating cash flow health and working capital management.
In the past year, we observed the following valuation multiple ranges for HVAC businesses. Revenue multiples typically ranged from 0.3x to 1.4x, with the median around 0.9x. Seller’s discretionary earnings (SDE) multiples fell between 1.1x and 7.0x, depending on factors such as profitability, growth, and operational efficiency, with a median of approximately 2.7x. EBITDA multiples exhibited a wider range—from 2.3x to as high as 25x—largely influenced by the nature of the transaction, strategic interest from buyers, and deal-specific motivations. While some of the higher-end multiples represent outliers, the typical median EBITDA multiple hovered around 3x.
To value an HVAC business, we typically analyze three to six years of historical financial data, applying normalization adjustments to ensure the financials reflect the true economic performance of the business. These adjustments may include discretionary expenses, non-operating or personal expenses, one-time or non-recurring items, and other comparability factors. We also benchmark the subject company’s performance against industry standards. For example, according to the latest plumbing and HVAC industry profile from First Research, the industry averages a gross profit margin of approximately 22% and an EBITDA margin of around 3%. If the subject company significantly outperforms these benchmarks, such factors are incorporated into our valuation analysis to reflect the company’s relative strength.
As an example, I recently valued an HVAC business for financing purposes using three years of tax return data. As part of our analysis, we performed a series of normalization adjustments to the income statements to reflect the company’s economic operating performance. Adjustments were made for items such as bad debt, cash over/short, charitable contributions, officer compensation, gifts, insurance, licenses, loan and finance fees, miscellaneous expenses, pension/profit sharing, prior year adjustments, depreciation, amortization, Section 481(a) adjustments, other income/expenses, and taxes.
A one-time bad debt expense was removed due to its non-recurring nature. Accounting-related items were excluded because they were non-operating. Discretionary expenses, including gifts, charitable contributions, pension, and profit-sharing, were also removed. In closely held businesses, it is common for owner compensation to deviate from market norms, so we adjusted the owner’s salary to reflect a market-based rate for an HVAC business owner. We also removed the cost of the owner’s life insurance, as it was a personal, discretionary expense. Negative balances in license and miscellaneous expense accounts were excluded, as they did not reflect actual operating costs. Loan and finance fees were removed due to their non-operating nature.
In 2024, the company’s depreciation expense exceeded prior years, therefore, we normalized it using the average of the prior two years, which amounted to approximately 0.4% of revenue. Amortization expenses and other non-operating income were removed to present earnings on a normalized operating basis. Taxes were adjusted based on a combined federal tax rate of 21% and the applicable state corporate tax rate.
When reviewing the historical balance sheets, we noted that a shareholder loan was unlikely to be repaid and therefore removed it. Similarly, the company’s intangible assets were determined to be non-operating and were excluded from the historical balance sheets to better reflect the operating value of the business.
To value the subject HVAC company, we applied both the capitalization of earnings method under the income approach and the merged and acquired company method under the market approach.
Under the capitalization of earnings method, we analyzed the company’s historical performance and determined that the most recent year’s normalized earnings best represent its ongoing earnings potential. Therefore, the valuation relies on that year’s results, which most accurately reflect the company’s current operating capacity and ability to generate sustainable cash flows. This forward-looking analysis is grounded in the company’s present financial and operational condition.
Cash flow adjustments included normalizing depreciation expense to 0.4% of revenues, based on the company’s two-year average, and assuming a working capital requirement of 12% of revenues, consistent with industry benchmarks sourced from the First Research Plumbing and HVAC Industry Profile.
To estimate the discount rate, we used the weighted average cost of capital (WACC), which reflects the blended cost of both debt and equity financing. We assumed an after-tax cost of debt of 7.51% and calculated the cost of equity at 22.37%. A target capital structure of 40% equity and 60% debt was selected based on industry standards. This resulted in a WACC of 13.45%. To derive the capitalization rate, we subtracted a long-term sustainable growth rate of 3.50%, yielding an after-tax capitalization rate of 10.00% (rounded).
For the market approach, we analyzed a set of nine comparable transactions. We observed the relationship between transaction values and key financial metrics—sales, SDE, and EBITDA—and selected median multiples of 0.92x, 2.74x, and 3.26x, respectively. To determine the appropriate weighting for each multiple, we employed a regression-based analysis, using the squared correlation coefficients to assess and normalize the relative strength of each relationship.
In our professional judgment, both the income and market approaches provide reasonable and supportable indications of value for the subject company. The income approach captures the company’s ability to generate ongoing earnings, while the market approach serves to validate those findings through real-world transaction data. By incorporating both methods, we achieve a more balanced and comprehensive perspective, reducing potential bias that might result from relying on a single methodology. Accordingly, we assigned equal weighting, 50% to the income approach and 50% to the market approach, to reflect the relevance and reliability of each.
As humorist Garrison Keillor once remarked, “It was luxuries like air conditioning that brought down the Roman Empire. With air conditioning their windows were shut; they couldn’t hear the barbarians coming.” Yet in truth, it is innovations like air conditioning, and broader HVAC technologies, that have propelled civilizations forward, enabling more comfortable, productive, and energy-efficient lifestyles across the globe.
[1] A Brief History of HVAC: Evolution of Modern Comfort. https://spaeder.com/a-brief-history-of-hvac-evolution-of-modern-comfort/.
[2] Grand View Research: HVAC Systems Market Size, Share and Trends Analysis Report By Equipment (Heat Pump, Air Conditioning, Air Purifier), By End-use (Residential, Commercial), By Region, And Segment Forecasts, 2025–2030, https://www.grandviewresearch.com/industry-analysis/hvac-equipment-industry?gad_source=1&gbraid=0AAAAADpExcD6B_QctFkc93h5ro2WQrx8o&gclid=Cj0KCQjwna6_BhCbARIsALId2Z2O4yscSRSqkLdIn0fDHA_JJWvNaV_iRCN-uej7Yyh-qq8OJSYk1C0aAhArEALw_wcB.
Nataliya Kalava, CVA, ABV, MAFF, CMEA, is an expert in the fields of business valuation and finance, with about 15 years of experience. She has led and contributed to numerous valuations for diverse purposes, including gift and estate tax planning, management planning, M&A transactions, SBA valuations, financial reporting, and litigation support. Ms. Kalava’s passion lies in helping business owners navigate ownership transitions, guiding them through challenges, and uncovering opportunities for growth. Her expertise is honed through a rich career journey, having worked with renowned organizations such as Equinix Inc., Humana Inc., BDO LLP, Sigma Valuation Consulting Inc., and PwC. Ms. Kalava’s dedication to her profession extends to education and community engagement. She has been an Adjunct Finance faculty member at the University of Tampa, imparting her knowledge to undergraduate students on corporate finance and investment. Furthermore, she organizes Continuing Legal Education (CLE) courses on business valuation topics accredited by the Florida Bar.
Ms. Kalava can be contacted at (813) 777-9706 or by e-mail to nkalava@one10firm.com.
