How Do I Know What My Home Services Business Is Worth?

Mike has been running his HVAC company for 22 years. He built it from one truck and a lot of late nights into a business doing $5 million a year in revenue. He has a good crew, loyal customers, and a reputation in his market that took two decades to earn.

Mike also has a number in his head. And when I ask him where that number came from, he says something I hear from almost every owner I talk to.

"We do five million a year. So I figure the business is worth around five million. Maybe more."

Mike isn't wrong to feel that way. Twenty-two years of work should be worth something significant. But the number in his head and the number a buyer will put on paper are almost never the same. And understanding why that gap exists is the first step toward closing it.

Buyers Don't Buy Revenue. They Buy Earnings.

When Mike looks at his business, he sees everything he built. When a buyer looks at the same business, they see one thing: what is this going to produce for me after Mike leaves?

That question gets answered through a number called EBITDA. It stands for Earnings Before Interest, Taxes, Depreciation, and Amortization, and while the name sounds complicated, the idea is simple. EBITDA is what the business actually generates as a cash-producing engine, stripped of the financing decisions and tax strategies that vary from owner to owner.

For Mike, that number starts with his profit, and then gets adjusted. His personal truck runs through the business. He pays himself a salary that's higher than what a replacement manager would cost. He had a one-time equipment expense last year that won't repeat. A good advisor works through all of those items with him, adds them back, and arrives at an adjusted EBITDA that reflects what the business truly produces. That adjusted number is what a buyer uses as the foundation for their offer.

So when Mike tells me his business does $5 million in revenue, my next question is always the same. "Okay. What does it produce?"

What a Buyer Is Actually Willing to Pay

Once a buyer knows the adjusted EBITDA, they apply a multiple to arrive at a valuation. Think of the multiple as a reflection of risk. The less risky the business looks to a buyer, the higher the multiple they're willing to pay. The more uncertainty they see, the lower it goes.

For Mike, this is where the conversation gets interesting, because his business has some real strengths and a few things that are quietly working against him.

On the positive side, Mike has strong recurring revenue from maintenance agreements. About a third of his annual revenue is pre-sold every year, which means a buyer doesn't have to start from zero. That's meaningful. Buyers pay more for predictability.

But Mike is also the business in a way that makes buyers nervous. His three biggest commercial accounts have his personal cell number and call him directly when something goes wrong. His lead technician has been with him for 15 years and is loyal to Mike, not necessarily to the company. If Mike walks out the door on closing day, a buyer has to ask themselves a hard question: how much of this revenue walks out with him?

That question affects the multiple. And the multiple affects the number on the term sheet more than almost anything else.

The Number on the Term Sheet Isn't Always What You Walk Away With

This is the part most owners don't see coming, and it's important.

Mike gets an offer. The headline number looks strong. But when he reads the actual structure of the deal, 25 percent is held in escrow for 18 months pending customer retention. There's an earnout tied to revenue targets over the next two years. The representations and warranties section runs 40 pages.

A different offer comes in with a lower headline number. But it's clean. Most of it is cash at close. The escrow is smaller. The earnout is tied to something Mike can actually control during his transition period.

Which deal is better for Mike? It depends entirely on the details, and the details are where owners without experienced representation get hurt. A private equity firm that closes dozens of deals a year has a team of people who negotiate structure every single day. Mike has done this once. Having someone in his corner who understands the difference between a headline number and a real outcome is often worth more than any single line item in the negotiation.

What Would Actually Move Mike's Number

After we walk through all of this, Mike usually asks the question I was waiting for. "So what do I do about it?"

The answer is almost always the same, and it's rarely about the business itself. Mike's business is good. What needs work is the story a buyer can verify.

Clean financials are the starting point. If Mike's books have been managed to minimize taxes, with personal expenses running through the company and income intentionally kept low, that creates a problem in diligence. Buyers don't give sellers credit for verbal explanations. They discount for anything they can't verify. Getting three years of clean, accountant-reviewed financials that reconcile clearly to the tax return is one of the most valuable things Mike can do before he goes to market.

Owner independence is the other big one. If Mike can spend the next 12 to 24 months gradually stepping back from those key customer relationships, building a management layer that runs the business without him in the room, and documenting the processes that currently live in his head, the business looks fundamentally different to a buyer. The risk profile drops. And when the risk profile drops, the multiple goes up.

None of this happens overnight. Which is exactly why the owners who get the best outcomes are the ones who start this conversation before they're ready to sell, not the day they decide they're done.

What Mike Does Next

At the end of our conversation, Mike sits back and says something I hear often. "I wish someone had told me this five years ago."

The good news is that Mike still has time. His business is worth real money. The gap between where it is today and where it could be with 12 to 18 months of preparation is significant, and it's closeable.

The first step is just an honest conversation about where things stand. What would a buyer see today? What would move the number in Mike's favor? And what does a realistic timeline look like for someone in his situation?

That's exactly the conversation we start with at NorthBase. No pressure to list. No obligation to do anything. Just a clear-eyed look at where your business stands and what your options actually are.

Schedule a confidential conversation with Jason at NorthBase Advisors. Book Here

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