The decision to sell a business is often a highly personal, emotional, and financial crossroads for an owner. We recently navigated a complex sale that perfectly illustrates the unforgiving relationship between a company’s earnings performance and its ultimate sale price and terms.
Our client, the owner of a well-established Mechanical Contracting (HVAC) business, came to us with a clear objective: sell the business for $4 million to fund his retirement. The problem was his company’s historical earnings did not support that valuation.
“The market simply doesn’t value a promise, it values a track record,” we explained.
The Problem: A Value Gap Defined by EBITDA
The owner’s business, while successful and established, had an Adjusted EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) of approximately $250,000.
In the M&A world, businesses are typically valued using a market-based pricing benchmark: the Price-to-EBITDA ratio (often called the EBITDA multiple). This ratio reflects how many years of a company’s cash flow a buyer is willing to pay.
For HVAC/Mechanical Contracting businesses, the data is clear. DealStats, the gold standard for comparable sale information used by business appraisers, reports that the typical range of Price/EBITDA ratios for this industry is from 3.8 to 7.0, with a mean (average) multiple of 5.0.
Using the market mean, the business’s current valuation looked like this:
$250,000 (Adjusted EBITDA) times 5.0 Mean Multiple) = $1.25 Million (Enterprise Value)
This created a $2.75 million value gap between the owner’s required $4 million and the market-supported $1.25 million. He could not retire comfortably at the current price.
The Strategy: Building a “Clean” and Predictable Business
Instead of trying to sell an underperforming asset at an inflated price, we advised the owner to spend the next 24 months focusing on two things: improving earnings and de-risking the business.
Our strategy, and the advice of his financial and tax advisors, focused on operational and structural changes that would directly impact on the M&A metrics:
- Reduce Non-Essential Costs: We identified and eliminated numerous “owner perks” and discretionary expenses that buyers would not credit as legitimate business costs. This immediately “cleaned up” the Adjusted EBITDA.
- Shift to Service Contracts: We helped the owner increase both revenue and the percentage of revenue from recurring, high-margin service contracts over one-off new construction projects. Buyers love predictability, and this shift earned a premium.
- Implement Management Systems: The owner hired a new General Manager and documented all operating procedures. This demonstrated the business could run without the owner, a critical factor in a successful transition.
By the end of the 24-month period, the owner successfully grew his Adjusted EBITDA from $125,000 to over $800,000.
The Outcome: A Strategic Buyer and the Premium Multiple
When we took the business back to market, the new financials told a compelling story: a growing, de-risked company with a strong trend of increasing profitability.
This performance trend is critical. A business with flat or declining earnings will typically sell at the lower end of the multiple range (closer to 3.8x). A business with a strong upward trend, like our client’s, attracts strategic buyers—industry players who can realize immediate synergies (cost savings and revenue growth).
A national HVAC consolidator—a strategic buyer—entered the negotiation. They saw the value in integrating the client’s recurring service base and management team into their national platform, justifying a premium valuation.
The final deal closed at an EBITDA multiple of 7.0 x, at the top of the DealStats range.
$800,000 (New Adjusted EBITDA) times 7.0 (Mean Multiple) = $5.6 Million (Enterprise Value).
The owner didn’t just meet his $4 million retirement goal—he exceeded it by $1.6 million.
Quote: The M&A War Story Lesson
“The true ‘war story’ in M&A isn’t about the negotiation, it’s about the preparation. A seller who walks in with a track record of improved, predictable earnings doesn’t just get a better price; they control the process. They eliminate the buyer’s leverage and shift the focus from past problems to future value, turning a median multiple into a premium multiple.”
— Greg Carpenter, Horizon M&A Advisors
The lesson is universal: to secure a premium price for a life’s work, a business owner must first secure a clean, profitable, and defensible earnings trend. The multiple will follow. (Note: some information is fictional, intended to illustrate a principle).