The asking price on that HVAC company looks reasonable — until you realize half the value is sitting in a filing cabinet full of maintenance contracts nobody's audited.
You're looking at an HVAC business. Revenue looks solid. Trucks are decent. The owner says he's got "a great book of service agreements." He pulls out a number — 400 agreements — and watches your eyebrows go up.
Here's what I learned the hard way: the number of agreements means almost nothing. What matters is whether those agreements actually make money, whether customers renew them, and whether they'll survive the day you take over.
I've seen a 150-agreement book worth more than a 600-agreement book. The difference was in the details. This is where you find the details.
Why Service Agreements Change the Math on Every Deal
A business with 30% or more of its revenue coming from maintenance agreements can command a full 1.0x higher SDE multiple than a comparable shop running on demand calls alone.
That's not a rounding error. On a business doing $400K in SDE, that's an extra $400,000 on the purchase price. So you need to understand what you're paying for.
Why do service agreements move the needle that hard? Three reasons.
Recurring revenue is predictable revenue. You know what's coming in next quarter. You can staff for it. You can plan around it. Demand work is feast or famine — 112 degrees in July, your phone's ringing off the hook. Mild October, you're wondering how to make payroll. Agreements smooth that curve.
Renewals prove customer relationships. A customer who's been on a maintenance plan for six years isn't price-shopping you against the new guy on Google. That's stickiness. That's lifetime value. Buyers pay a premium for it and lenders underwrite against it.
Lenders love it. SBA lenders look at recurring revenue the way a bank looks at a tenant with a 10-year lease. It de-risks their loan. I've watched loan terms improve materially when the maintenance agreement book was strong.
But here's the flip side.
A book of 200 agreements priced at $79 a year — below what it costs to roll a truck twice — isn't gold. It's a liability. The previous owner used cheap agreements to get his foot in the door for equipment replacements. Smart sales strategy, terrible acquisition asset. You're inheriting below-cost obligations with no margin.
Your job in due diligence is to figure out which kind of book you're looking at. The gold mine or the money pit.
The Five Numbers That Tell the Real Story
Forget the seller's narrative. These five numbers will tell you everything you need to know about whether a service agreement book is an asset or a headache.
1. Total agreement count and trend
How many active agreements are there today? How many were there one year ago? Two years? Three?
A growing book — say 280 to 320 to 370 over three years — tells you the business is adding customers and retaining them. That's a sign of a healthy operation with good service delivery.
A flat book means new sales are barely replacing churn. Not terrible, but not a growth story.
A shrinking book is a red flag. Either service quality has dropped, pricing got out of line, or the owner checked out and stopped selling agreements. You need to know which one, because the fix is different for each.
Ask for monthly or quarterly agreement counts going back three full years. Not just a current snapshot.
2. Average annual revenue per agreement
This is where amateurs get fooled. A "400-agreement book" sounds impressive until you do the division.
Residential benchmarks: A properly priced residential maintenance agreement runs $150 to $350 per year, depending on your market and what's included. Two visits — one spring, one fall — with a filter change and basic inspection. Some shops bundle a discount on repairs. Fine.
If the average revenue per residential agreement is $90, those are loss leaders. The previous owner was using them as a marketing expense, not a profit center. You'll need to reprice them, and when you do, a chunk of those customers will walk.
Commercial benchmarks: Commercial agreements range from $500 to $5,000+ per year depending on the equipment, the building, and the SLA. A 20-unit rooftop package on a strip mall is a different animal than a single mini-split in a dentist's office.
Commercial agreements are where the real money lives. More on that in a minute.
3. Churn rate
What percentage of agreements don't renew each year?
- Under 15%: Healthy. Customers are satisfied and see the value.
- 15% to 25%: Average. Room to improve, but not alarming.
- Over 25%: Something's broken. Either the service isn't delivering, the pricing is out of line, or the agreements include things customers don't actually want.
High churn guts the value of the book because you're constantly replacing lost agreements just to stay even. That means ongoing sales and marketing costs that eat into the margin you thought you were buying.
4. Cost to service
This is the number sellers almost never volunteer. What did it actually cost — labor plus parts plus drive time — to service the agreement book last year?
Pull the work orders. Add up tech hours, parts used, and truck rolls for every agreement visit. Compare that total to agreement revenue.
If it cost $62,000 in labor and parts to service a book generating $58,000 in revenue, you're not buying a profit center. You're buying an obligation to lose $4,000 a year before you even factor in overhead.
The margin you want to see: Agreement revenue should exceed direct service cost by at least 30-40%. That leaves room for overhead allocation and actual profit.
5. Vintage distribution
When were these agreements signed?
A healthy book has depth. You want to see customers who've been on agreements for five, eight, ten years. Those are sticky relationships. They renew automatically. They call you first when the compressor dies.
If 60% of the agreements were signed in the last 12 months, be skeptical. Sellers sometimes go on an agreement sales blitz before listing the business. Those brand-new customers have no loyalty to the company — they signed up for a deal. They're the first ones to cancel when something changes. Like, say, ownership.
Ask for a distribution chart: how many agreements are less than 1 year old, 1-3 years, 3-5 years, 5+ years. The shape of that chart tells you a lot.
Residential vs. Commercial Agreements — Different Animals
Not all service agreements are created equal, and the mix in the book you're evaluating changes the valuation conversation significantly.
Residential agreements
The profile: High volume, lower revenue per contract, relatively simple to service. Your tech shows up, checks the system, changes the filter, verifies the thermostat, maybe cleans the condensate drain. Two visits a year. In and out in 45 minutes to an hour.
The upside: These are straightforward to fulfill. Any competent residential tech can handle the visit. Scheduling is flexible — the customer just wants it done sometime in the spring and sometime in the fall.
The downside: Churn is higher. A residential customer who gets a $280 renewal notice and just had the roof replaced will cut the maintenance plan first. Homeowners move. Systems get replaced and the new equipment comes with a manufacturer warranty that makes the agreement redundant for a few years.
Typical residential churn: 15-20% annually even in a well-run shop.
Commercial agreements
The profile: Lower volume, much higher revenue per contract, longer contract terms (often 1-3 years with auto-renewal), and specific performance requirements.
A single commercial agreement on a 50,000 square foot office building with 12 rooftop units could be worth $3,500 to $8,000 per year. That one contract might equal the revenue of 20 residential agreements.
The upside: Stickier relationships. Property managers don't switch HVAC contractors for fun — it's a hassle. Commercial renewals often run 85-95% when service is solid. The revenue per truck roll is substantially higher.
The downside: You need techs who can handle commercial equipment. If the business you're buying has been doing light commercial — think restaurants, small retail, medical offices — and the existing techs know those systems, you're fine. But if the book includes industrial chillers or complex BAS-integrated systems and the one tech who handled those just retired, you've got a gap.
Emergency SLAs in commercial contracts also matter. If the agreement guarantees a 4-hour response time, you need to be able to deliver that. Day one.
Mixed books
Most HVAC businesses have a mix. The ratio matters.
A book that's 85% residential and 15% commercial behaves differently than one that's 50/50. The commercial-heavy book generates more revenue with fewer agreements but requires more specialized labor and carries higher stakes if you underperform.
Neither mix is inherently better. But you need to know what you're buying and whether you have the team to service it.
Transferability difference
Here's the one that catches buyers off guard: residential agreements almost always transfer automatically. The homeowner usually doesn't care who shows up as long as the work gets done.
Commercial contracts are different. Many include language requiring the client's consent for assignment to a new owner. A property management company with 14 buildings on your agreement book has leverage — and they know it. They might use the ownership change as an opportunity to renegotiate pricing or bid the work out.
The Transferability Audit
This is the section that saves deals — or kills bad ones before you waste six months.
The critical question: do these agreements survive an ownership change?
You'd be amazed how many buyers assume the answer is yes without ever reading the contracts. Don't be that buyer.
Three scenarios
Auto-transfer (best case). The agreement language says the contract is binding on successors and assigns. When you buy the business, the agreements come with it. No customer approval needed, no renegotiation. You just keep servicing them.
Requires notification (manageable). The agreement says the company must notify customers of any change in ownership, but doesn't require their consent. You send a letter, introduce yourself, assure them nothing changes on their end. A few might cancel. Most won't.
Requires consent (risky). The agreement explicitly requires the customer's written consent before it can be assigned to a new party. This is more common in commercial contracts. Every one of these agreements is at risk during the transition. Some customers will use it as leverage. Some will walk.
Read the actual contract language
Do not take the seller's word for what the contracts say. Sellers aren't lying — they just haven't read their own contract templates in eight years. The version they used in 2018 might have different assignment language than the one they switched to in 2022.
Pull the actual documents. Read the assignment clause. If the contract was drafted by a lawyer, there's usually an "Assignment" or "Successors and Assigns" section. If the contract was drafted on the back of a work order — and yes, I've seen that — then there's no assignment language at all, which is its own problem.
Do this: Ask for a random sample of 10 contracts — mix of residential and commercial, mix of old and recent. Read the assignment clause in each one. If there isn't one, that's a problem. If the language varies across contracts, that's a different problem. Either way, now you know what you're dealing with.
Customer notification strategy
Even when contracts auto-transfer, you should proactively communicate with agreement customers. These are your best customers. The ones paying you every year whether anything breaks or not. Don't let them find out about the ownership change from a stranger in a different truck showing up for their spring tune-up.
When to tell them: After closing, not before. You don't want the seller's agreement customers getting nervous and canceling during a 60-day due diligence period. Once the deal is done, send a letter within the first week.
How to frame it: Keep it simple. New ownership, same great technicians, same commitment to service, here's a direct phone number if you have questions. A personal touch goes a long way. If you can call the top 20 commercial accounts yourself in the first week, do it.
What not to do: Don't change the pricing, the service schedule, or the terms in the first year. You just bought these relationships. Honor them. You can adjust pricing at renewal time once you've proven yourself.
Watch for transferability red flags in every deal. 12 HVAC Acquisition Red Flags That Kill Deals covers the full spectrum of problems that should make you walk away — or negotiate harder.
What a Healthy Service Agreement Book Looks Like
After evaluating dozens of HVAC businesses, here's what separates a strong book from a weak one.
Strong book
- 200+ residential agreements with 3+ year average tenure
- 15-30 commercial agreements with multi-year terms
- Churn under 15% annually
- Agreement revenue exceeds direct service cost by 35%+
- Growing year over year — adding more agreements than it loses
- Pricing reflects actual cost — agreements are priced to be profitable, not just door-openers
Weak book
- Agreements mostly created in the last 18 months
- Priced below the cost to deliver (the "$79 tune-up plan" model)
- Churn above 25%
- No commercial agreements at all
- Flat or declining count
- No systematic renewal process — agreements lapse and nobody follows up
The pricing question
This is subtle but important. Was the agreement book built to be profitable on its own, or was it built as a customer acquisition tool?
Both strategies work. But they produce very different assets for a buyer.
If agreements were priced as loss leaders to win equipment replacement business, the book generates negative margin on service visits. The profit was in the $8,000 system install that followed. You're buying the service obligation without the guaranteed upsell.
If agreements were priced to be profitable on their own — with the upsell as a bonus — you're buying a standalone revenue stream. That's worth a lot more.
A 500-agreement book at $99/year is not better than a 200-agreement book at $250/year. The first one generates $49,500 in revenue and probably loses money on service delivery. The second generates $50,000 and likely turns a real profit. Same revenue, completely different value to a buyer.
Need to understand how agreement revenue fits into the full valuation picture? Chapter 3: HVAC Business Valuation covers SDE calculations, revenue multiples, and seasonal cash flow adjustments.
Your Service Agreement Due Diligence Checklist
When you're evaluating an HVAC acquisition, request these eight items related to the service agreement book. Every one of them.
- Complete agreement roster with start dates. Every active agreement, the customer name, address, system type, agreement tier, annual price, and the date the agreement started. If this doesn't exist in a spreadsheet or their service software, that's your first warning sign.
- Three years of renewal rates. Annual renewal percentage for each of the last three years. Not an estimate — the actual number. If they track this in ServiceTitan, Housecall Pro, or whatever platform they use, it's a simple report. If they can't produce it, they haven't been tracking it.
- Cost breakdown per agreement tier. If they offer a "Silver" and "Gold" plan, what's the average direct cost (labor + parts) to deliver each tier? You need this to calculate whether each tier is profitable.
- Sample contracts (minimum 10). A mix of residential and commercial, old and recent. You're reading these for assignment clauses, auto-renewal language, cancellation terms, and any service guarantees you'll need to honor.
- Cancellation history with reasons. How many agreements were cancelled in each of the last three years, and why? If 40 customers cancelled last year and 30 of them cited "poor service" or "no-show," that tells you something different than 40 cancellations due to customers moving or selling their homes.
- Pricing change history. When was the last time agreement pricing was increased? By how much? What was the customer reaction? If the seller hasn't raised prices in four years, you're inheriting below-market agreements. If they raised prices 25% last year and churn spiked, you know the ceiling.
- Assignment clause review. Confirm the standard language on all active contract versions. Identify any commercial contracts that require client consent for ownership transfer. Flag these for your transition plan.
- List of agreements renewing in your first six months. These are the ones you need to retain immediately. If 80 agreements come up for renewal in the first 90 days, your transition communication plan just became urgent. You need those customers to see continuity before they see a renewal notice from someone they've never heard of.
If the seller can't produce this data
That tells you something important.
It doesn't necessarily mean the business is bad. Plenty of good HVAC operators run their agreement books informally — renewals happen because Mary in the office calls everyone in March, and she's been doing it for 12 years, and it works.
But "it works because Mary does it" is a key-person risk, not a system. And if the data doesn't exist in any organized form, you're buying a black box. You won't know the real renewal rate, the real cost to service, or the real churn until you've owned the business for a year.
Adjust your offer accordingly.
The service agreement book is just one part of due diligence. Chapter 4: Due Diligence for HVAC Acquisitions covers the full inspection checklist — customer contracts, fleet condition, licensing, insurance, employee retention, and more.
Frequently Asked Questions
How much are HVAC service agreements worth in a business acquisition?
Service agreements are typically valued as part of the overall business multiple, but a strong agreement book — 30%+ of revenue from maintenance contracts with under 15% churn — can add 1.0x to the SDE multiple. For a business with $400K in SDE, that's an extra $400,000 in purchase price.
Do HVAC service agreements transfer when a business is sold?
It depends on the contract language. Residential agreements usually auto-transfer. Commercial contracts often require client notification or consent. Always read the actual assignment clause in sample contracts during due diligence.
What is a good churn rate for HVAC maintenance agreements?
Under 15% annual churn is considered healthy. Between 15-25% is average. Above 25% indicates a problem with service quality, pricing, or perceived value.
How many service agreements should an HVAC company have?
There's no universal number, but a mature residential HVAC company with a healthy agreement program typically maintains 200-400+ residential agreements and 15-30+ commercial agreements. The quality and profitability of those agreements matters more than the count.
What's the difference between a profitable and unprofitable HVAC service agreement?
A profitable agreement is priced so that annual revenue exceeds the direct cost to deliver (labor + parts + truck roll) by at least 30-40%. An agreement priced at $99/year that costs $120 in labor and parts to fulfill is unprofitable — and you're buying that loss with every agreement on the books.
The service agreement book is where smart HVAC buyers separate themselves from the ones who overpay. The seller will always tell you the agreements are valuable. Your job is to prove it — with data, with contract language, and with math that actually works. Do the homework. It's worth it.
