Selling Your Trade Business to Private Equity: What Owners Need to Know

Learn what HVAC, plumbing, and electrical business owners should understand before selling to private equity, including valuation, rollover equity, earnouts, due diligence, taxes, and life after the sale.

By Kendall Maccagnan, CPA, CFP® and Financial Advisor in Tampa, Florida

Selling Your Trade Business to Private Equity: What Owners Need to Know

Private equity firms continue to show interest in HVAC, plumbing, electrical, and other home service businesses. For business owners, this can create an opportunity to sell all or part of the company. It can also introduce a deal structure that is more complicated than simply receiving a check and retiring.

Before selling your HVAC, plumbing, or electrical business to private equity, it is important to understand what the buyer is purchasing, how the offer is structured, what responsibilities you may retain, and how much of the purchase price you may actually receive at closing.

What Does It Mean to Sell to Private Equity?

A private equity firm raises money from investors and uses that capital to acquire businesses. The firm generally intends to improve and grow those businesses before eventually selling them or completing another financial transaction.

In the trades, a private equity buyer may acquire an established HVAC, plumbing, or electrical company as a platform business. The buyer may then acquire additional contractors, sometimes called add-on businesses, and combine them into a larger organization.

Private equity buyers may be interested in contractors with:

• Consistent revenue and profitability

• Experienced technicians and managers

• Recurring maintenance or membership revenue

• Strong local market recognition

• Reliable financial records

• Opportunities to expand geographically

• Limited dependence on the owner

Every buyer has different criteria. A company does not necessarily need to be the largest contractor in its market, but it may need to demonstrate that its earnings are sustainable and that the business can continue operating after a change in ownership.

How Is a Trade Business Valued?

A private equity buyer will generally focus on the company’s normalized earnings rather than revenue alone. Larger contracting businesses are often discussed using adjusted EBITDA, or earnings before interest, taxes, depreciation, and amortization. The buyer may adjust EBITDA to remove unusual, nonrecurring, or owner-specific expenses.

Examples of potential adjustments may include:

• Personal expenses paid by the business

• One time legal or consulting costs

• Excess owner compensation

• Compensation needed to replace the owner

• Unusual repairs or losses

• Expenses associated with discontinued operations

  
  

Not every expense claimed as an add-back will necessarily be accepted by a buyer. The buyer may test whether each adjustment is documented, legitimate, nonrecurring, and unlikely to continue after the transaction. Disagreements over adjusted EBITDA can materially affect the final valuation. For more information on normalized earnings click here.

The Highest Offer May Not Provide the Most Cash at Closing

One of the most important parts of a private equity offer is the structure of the purchase price.

A buyer may describe the total value of an offer using several components:

• Cash paid at closing

• Rollover equity

• Seller financing

• Earnout payments

• Escrow or holdback amounts

• Employment or consulting compensation

For example, an owner may receive an offer described as $6 million. However, the structure could include $4 million in cash at closing, $1 million of rollover equity, $500,000 in a seller note, and a potential $500,000 earnout.

That does not necessarily make the offer unattractive. It does mean the owner should understand which portions are guaranteed, which depend on future performance, and which may remain at risk.

What Is Rollover Equity?

Rollover equity means the seller reinvests part of the sale proceeds into the acquiring company or its parent organization. Instead of receiving the entire purchase price in cash, the owner retains an ownership interest and may benefit if the combined company grows and is later sold at a higher value.

This potential future transaction is sometimes described as a second bite of the apple.

However, rollover equity is still an investment. Its future value is not guaranteed, and the owner may have limited control over when the investment can be sold.

Before accepting rollover equity, an owner may want to understand:

• What entity they will own

• The percentage ownership they will receive

• The rights attached to their equity

• Whether future investors can dilute their ownership

• How distributions will be determined

• What happens if they leave the company

• When another sale may occur

• Whether the private equity firm receives its money before other owners

The headline value assigned to rollover equity may not be the same as cash available for retirement or personal spending.

What Is an Earnout?

An earnout is a future payment that depends on the company meeting defined performance targets after the sale.

The target may be based on revenue, EBITDA, customer retention, or another financial measure. Earnouts can help bridge a valuation gap between what the owner believes the company is worth and what the buyer is willing to pay upfront.

The owner should understand how the earnout is calculated, who controls the company’s spending and pricing after closing, and whether the buyer can make decisions that affect the target. An earnout may be less valuable when the seller no longer controls the operational or financial decisions required to achieve it.

Will the Owner Need to Stay After the Sale?

Many private equity buyers want the owner to remain involved for a transition period. In some cases, the owner may continue leading the company for several years. The buyer may want the owner to preserve customer relationships, retain employees, support acquisitions, or help grow the local market.

The owner should clarify:

• Their role after closing

• Decision making authority

• Compensation and benefits

• Performance expectations

• Length of employment

• Noncompete restrictions

• What happens if employment ends early

• Whether departure affects rollover equity or earnout payments

An owner who wants to retire immediately may prefer a different deal from an owner who wants to help grow the company.

What Happens During Due Diligence?

Private equity due diligence is typically more extensive than an informal review of the company’s tax returns.

The buyer may request several years of:

• Financial statements

• Tax returns

• Bank statements

• Payroll reports

• Customer and revenue data

• Maintenance agreement records

• Job costing reports

• Employee information

• Vehicle and equipment schedules

• Contracts, leases, and insurance policies

The buyer may also commission a quality of earnings analysis to evaluate whether reported EBITDA is accurate and sustainable. If ServiceTitan, QuickBooks, payroll reports, tax returns, and bank activity do not reconcile, the buyer may question the reliability of the financial statements.

Preparing financial records before entering the sale process may reduce surprises and help the owner respond to buyer requests more efficiently.

For more information on preparing records, click here.

How Much Will the Owner Actually Keep?

The purchase price is not the same as the owner’s after-tax proceeds.

The final amount may be affected by:

• Business debt

• Transaction fees

• Taxes

• Working capital requirements

• Escrow amounts

• Seller notes

• Rollover equity

• Earnout provisions

• The sale of business real estate

The tax treatment may also depend on the company’s entity type, whether the transaction is structured as an asset or equity sale, and how the purchase price is allocated.

Owners may benefit from modeling the potential outcome before signing a letter of intent. Once major deal terms are agreed upon, some planning opportunities may become more limited.

Consider the Personal Financial Plan Before Accepting an Offer

A private equity sale can change an owner’s financial life quickly. Before accepting an offer, the owner may want to consider whether the cash received at closing is sufficient to support retirement, future spending, taxes, family goals, and other investments.

The personal plan should distinguish between:

• Cash available immediately

• Contingent future payments

• Illiquid rollover equity

• Employment income after closing

• Business or real estate interests retained by the seller

An owner may receive an attractive total offer while still having less immediately investable cash than expected.

Frequently Asked Questions

Is private equity buying HVAC, plumbing, and electrical businesses?

Private equity firms may acquire profitable trade companies as standalone platforms or as additions to existing home service organizations. Interest varies by buyer, location, company size, profitability, and business model.

Do I have to sell 100% of my business?

Not always. Some transactions involve a complete sale, while others allow the owner to retain equity in the larger organization. The available structure depends on the buyer and the transaction.

Can I leave immediately after selling?

It depends on the deal. Some buyers may require the owner to remain for a transition period or continue operating the company under an employment agreement.

Is rollover equity guaranteed to increase in value?

No. Rollover equity may appreciate, remain unchanged, or lose value. It should generally be evaluated as an investment rather than guaranteed sale proceeds.

When should I begin preparing for a private equity sale?

Preparing three to five years in advance may give an owner time to improve financial records, strengthen management, reduce owner dependence, and establish consistent profitability. For more information on how you can prepare, click here.

The Bottom Line

Selling an HVAC, plumbing, or electrical business to private equity can provide liquidity and create an opportunity to participate in the future growth of a larger company. It can also involve rollover equity, earnouts, continued employment, extensive due diligence, and restrictions that continue after closing.

Owners should look beyond the headline valuation and evaluate the cash paid at closing, contingent payments, future responsibilities, tax consequences, and personal financial impact. The best offer may not always be the one with the highest stated purchase price. It may be the offer that provides the right combination of cash, risk, flexibility, and alignment with what the owner wants life to look like after the transaction.

This content is provided for educational and informational purposes only and should not be construed as investment, tax, or legal advice. It is not intended as a solicitation or offer to provide advisory services in any jurisdiction where Off the Bay Wealth, LLC is not properly registered or otherwise permitted to operate. Information presented is based on sources believed to be reliable; however, accuracy and completeness are not guaranteed. This material is not intended to be a comprehensive analysis of all topics discussed. IRS provisions are subject to ongoing guidance and regulatory updates. Any financial decisions should be made in consideration of your individual circumstances, including your goals, risk tolerance, and time horizon. Investing involves risk, including the potential loss of principal.