A Seller-Financed Home Services Purchase

What happened

A retiring owner listed a thirty-year-old HVAC business at about 2.75 times its discretionary earnings, and the buyer could only cover half in cash and bank debt. They structured the rest: a seller note for 30% paid over five years, and 10% as an earnout tied to keeping the service contracts. The seller's willingness to carry that note, and to stake part of his own payout on retention, was itself the strongest thing diligence found. The owner stayed six months, contracts retained above target, and the note and earnout paid as planned.

The case, start to finish

A seller willing to carry paper on their own business is telling you something about that business that no spreadsheet can.

Two gaps, one shape

An anonymized composite, built from documented deal norms: roughly 60% of small-business sales include some seller financing, and HVAC companies commonly change hands somewhere around 2.5 to 2.75 times seller's discretionary earnings.

The situation was two problems that looked separate. A retiring owner had run an HVAC company for 30 years and priced it at about 2.75 times SDE, a price justified in part by customer loyalty that he personally embodied. The buyer, meanwhile, could assemble roughly half of that price from cash and an SBA loan.

Read separately, the first is a valuation disagreement and the second is a financing shortfall, and each of them looks like a reason the deal dies. Read together, they are the same problem asked from two sides, and a single structure answers both.

Asking the seller to carry it

The deal closed as 60% bank and buyer cash, 30% a seller note repaid over five years, and 10% an earnout tied to how many service contracts survived the handover. Each piece does a specific job.

The note closes the cash gap without loading on more bank debt, and it does so at a lender who understands this business better than any bank could. The earnout does something subtler. It prices the exact risk the two sides disagreed about. If the loyalty belonged to the company, the contracts renew and the seller collects the full price he asked for. If it belonged to the man, they do not, and he collects less. Neither party had to win the argument, because the structure let the outcome settle it.

It also rearranges the seller's incentives during the transition. A seller paid entirely in cash at closing has no particular reason to answer the phone in month four. A seller holding five years of note payments and an earnout tied to retention has every reason to walk the new owner around to the accounts personally. That is what he did across the six months he stayed.

The yes as diligence

The most useful property of seller financing has nothing to do with money. It is that asking produces information. A seller who agrees to carry 30% for five years is betting a third of their sale price on the business. It has to keep generating enough cash to pay them after they are gone. A seller who refuses, or who will only carry a token slice, is telling you what they privately believe about those same years.

That is a signal rather than a proof, and it should never replace ordinary diligence. But it is a cheap and honest one in a process where most of the available signals come from a document the seller prepared. The purchase was also structured as an asset purchase, which left old liabilities behind with the old entity rather than importing them along with the trucks.

The winter the model did not include

Nothing here went catastrophically wrong, which makes the one thing that did more instructive. The buyer under-budgeted working capital for seasonal swings and spent one tight winter servicing the SBA loan and the seller note out of a business whose cash arrives unevenly across the year.

That is the standing cost of a structure like this. debt service is a fixed monthly obligation stacked on revenue that is not fixed, and stacking two lenders onto a seasonal business narrows the room for a bad quarter considerably. The structure that made the purchase possible is the same structure that makes the first two years tight.

For anyone looking at a business they cannot fully fund, the transferable idea is that structure allocates risk rather than merely bridging a gap in the price. Ask who bears the uncertainty in each piece of the deal, try to leave each risk with the party who knows most about it, and then hold back more cash than the model says you need.

Timeline

• Month 0 Retiring owner lists a 30-year HVAC business at ~2.75× SDE; buyer can cover only half in cash plus an SBA loan.
• Month 2 Deal structured: 60% bank/SBA + buyer cash, 30% seller note over 5 years, 10% earnout tied to service-contract retention.
• Month 3 Seller's willingness to carry the note (and stake pay on retention) validates the diligence; deal closes as an asset purchase.
• Year 1–2 Owner stays 6 months for transition; contracts retain above target; note and earnout pay as planned.

You're in the owner's chair

The retiring owner wants ~2.75× SDE, priced partly on customer loyalty HE personally embodies, and you can only cover about half with cash and an SBA loan. What do you do?

• Walk — the price doesn’t pencil without the owner
• Propose a seller note and a retention-tied earnout
• Stretch to cover the full asking price with cash and bank debt

The capital stack that closed the gap

• Bank/SBA loan + buyer cash: 60%
• Seller note (5 years): 30%
• Earnout tied to contract retention: 10%

The structure did three jobs at once: bridged the buyer’s cash gap, bridged the valuation gap, and kept the seller financially invested in a clean handoff.

Business model

Essential home services (install + maintenance contracts) bought as a going concern. Recurring service agreements were the durable asset; the seller's presence was the transferability risk.

Revenue model

Installation projects plus recurring maintenance contracts. The contracts were the valuation backbone and the earnout's measuring stick.

Cost structure

Technicians, vehicles, parts, insurance, plus the acquisition's capital stack: SBA debt service and the seller-note payments, both paid from the business's own cash flow.

Strategic challenge

A valuation gap (the seller priced for loyalty he personally embodied) and a financing gap (the buyer lacked full cash). Both were solved by the same structure.

Key decision

Ask the seller to finance. The note lowered the cash needed, bridged the price gap, and kept the seller invested in a clean transition. His ready "yes" was itself diligence: he believed the cash flow would keep paying.

What worked

The alignment mechanics: seller note + retention earnout made the departing owner an active ally in transferring relationships. The asset-purchase structure left old liabilities behind.

What failed

Nothing fatal, but the buyer under-budgeted working capital for seasonality and had one tight winter servicing both the SBA loan and the note. Debt stacked on a seasonal business needs a cash buffer.

Risk factors

Owner-dependent customer loyalty; key technician retention; debt service on stacked financing through slow seasons; earnout measurement disputes.

Lesson summary

Seller financing is a financing tool and a lie detector: it lowers the cash you need, and the seller's willingness to bet on their own business tells you what they really believe. Structure allocates risk, so use it.

Key data

• ~60% of small-business sales Deals with seller financing
• ~2.75× SDE (HVAC median range) Price
• 60% cash/SBA · 30% seller note · 10% earnout Structure

Sources & basis

The business in this story is a stand-in, not a company you can look up. This case is an illustrative composite: the operator, the people and most of the dollar figures represent a pattern rather than reporting one firm's history. What the list below cites is the other half, the documented industry data and public reporting the composite was assembled from, including any real company whose published figures the case draws on by name. The mechanism and the arithmetic are real even where the business is not.

1. Business-brokerage seller-financing prevalence (~60%)
2. HVAC valuation multiples (~2.5–2.75× SDE)
3. Composite: see Seller Financing and Earnouts lessons