Quality of Earnings for Home Services: What Buyers Miss in HVAC, Plumbing, and Roofing Acquisitions

A buyer signed an LOI for a $4.2M plumbing company in Phoenix. The seller's books showed $1.1M in EBITDA. Six weeks later, normalized EBITDA was $740K and the deal closed at $2.9M.

The $360K gap was not fraud. It was three things every home services buyer misses: seasonal revenue smoothed across a trailing twelve months, subcontractors that should have been W-2 employees, and customer deposits booked as revenue.

If you are buying a plumbing, roofing, HVAC, or electrical business, this post will save you from writing a check for the wrong number.

The Seasonal Revenue Problem

Most home services businesses do 60% of their work in two seasons. HVAC peaks in July. Plumbing spikes after the first hard freeze. Roofing follows hail and hurricanes.

A seller who shows you a clean trailing-twelve-month EBITDA can hide three months of negative cash flow inside it.

Here is what we look for in a home services QoE:

- Monthly revenue trended over 36 months, not 12

- Gross margin by service line, by month

- Marketing spend timing relative to revenue

- Service call counts by month

A roofing company in Houston showed us $3.4M revenue and $620K EBITDA on a TTM basis. When we trended monthly, 71% of revenue hit in five months. The other seven months ran $42K in monthly losses.

The buyer needed $250K in working capital reserves the seller had been hiding inside good months. We adjusted the working capital peg and the buyer closed with $250K more cash at close.

The Subcontractor Classification Trap

"All my guys are 1099. Saves on payroll tax."

Every other home services seller says some version of this. Half the time it is wrong.

The IRS test for employee vs contractor looks at three things: behavioral control, financial control, and the nature of the relationship. A plumber who shows up at your shop at 7 AM, drives your truck, wears your uniform, and works for no one else is an employee. Not a contractor.

When the QoE catches this, the buyer has two options. Reprice the deal to cover three years of back payroll taxes plus penalties. Or walk.

An example. HVAC company in Dallas. $2.8M revenue. The seller had 14 "subcontractors" who all worked for this business and no one else. Reclassification exposure: $186K in back payroll taxes, $94K in penalties.

The buyer renegotiated price down by $280K and required the seller to convert all 14 to W-2 before closing. The seller agreed because the alternative was losing the deal.

Customer Deposits and Revenue Recognition

Roofing companies collect 50% down. HVAC installers collect 30%. Plumbers doing repipes collect the full job up front.

When does that money become revenue? Not when it hits the bank account.

Sellers often book deposits as revenue the day they receive the check. That inflates current period revenue and EBITDA. A QoE corrects it to recognize revenue when the job is complete.

We reviewed a plumbing company doing $4.6M in revenue. The seller had $312K in customer deposits sitting on the balance sheet but had already booked $186K of it as revenue. The adjustment dropped EBITDA by $94K.

The fix is to look at the deferred revenue schedule against signed contracts and field reports. If the deferred revenue does not match outstanding jobs, the books are wrong.

This is one of the common QoE adjustments that catches most home services buyers off guard.

Customer Concentration Without the Spreadsheet

Most home services owners will tell you "we have no customer concentration."

Then you ask for a customer revenue report and find that one property management company represents 38% of revenue.

A QoE pulls customer revenue for the trailing three years and ranks it. Anything over 10% from a single customer is concentration. Anything over 20% is a deal issue.

Common patterns in home services:

- HVAC: property managers and homebuilders

- Plumbing: restaurant groups, hotels, and apartment complexes

- Roofing: insurance restoration referral networks

- Electrical: general contractors and solar installers

A roofing company looked clean on the surface. Diversified residential book of business. Then we found that 47% of revenue came from two insurance adjusters who referred storm damage work. One of them had retired three months before the sale.

That deal did not close.

What to Ask For Before You Sign the LOI

If you are looking at a home services acquisition, ask for these documents before you commit to an exclusivity period:

- 36 months of monthly P&Ls (not just annual)

- Service revenue by line of business (installation vs service vs maintenance contracts)

- Customer revenue report

- 1099 payroll detail with role descriptions and hours worked

- Customer deposit aging report

- Maintenance contract list with renewal dates

- Truck and equipment list with year, make, model, and miles

If the seller cannot produce these in two weeks, the books are not ready for diligence. Either the broker will get them to you or the seller has been running the business on instinct. Both are red flags.

The Working Capital Math Most Buyers Get Wrong

Home services businesses have working capital cycles that look nothing like manufacturing or distribution.

A plumbing company might collect within 7 days but pay the supply house on 30-day terms. That mismatch means customers fund the business before suppliers get paid, so it runs on minimal or even negative working capital and throws off cash. That negative balance isn't a hole the buyer has to fill. It revolves on its own. Old payables get paid as new ones replace them, and the business keeps running on other people's money after close, just as it did before.

That's exactly why the peg matters. The working capital target should equal the business's normalized level, which for home services is frequently below zero. Set it there, and a negative balance at close costs the buyer nothing extra, because they're getting the same self-funding machine they agreed to pay for. The money moves only when delivered working capital deviates from that peg.

The trouble starts without a QoE. The peg gets built off the seller's presented numbers, and two things tend to be off. The normal level gets anchored to a favorable snapshot instead of a seasonally-adjusted trailing average, and the seller sweeps receivables or stretches payables in the weeks before close so the delivered position looks better than the true run-rate. Either way the buyer pays a target that was never real. We see it on most home services deals that close without a QoE, and the wrong peg runs $40K to $200K.

A second item hides one layer down: maintenance contract liabilities. An HVAC company sells a $399 annual tune-up contract in January and owes the customer two visits over the next 12 months. That $399 is deferred, not earned at signing. It becomes revenue only as the visits are delivered.

We worked an HVAC deal in San Antonio with 2,400 active contracts. The seller had recognized 100% of contract revenue at the point of sale, so two separate things were wrong. On the balance sheet, the unearned obligation the buyer would inherit sat at $284K. That's a debt-like item, and it should come off the price dollar-for-dollar, the same way you'd treat a loan the buyer assumes. Separately, because the contract book was growing, the unearned balance had climbed $170K over the period, which overstates earnings. Normalizing that dropped EBITDA from $890K to $720K.

One trap to avoid: you pick one treatment for the deferred balance, not both. Pull it out as a debt-like reduction to price, or leave it inside the working capital peg, but never both, or someone gets paid twice for the same dollars.

Both adjustments change the number the buyer writes at close. Neither shows up without someone digging into the balance sheet. That's what a QoE is for.

What to Do Next

If you are 30 days out from closing on a home services business and have not started a QoE, you are behind.

- Pull the documents listed above and review them yourself

- If anything is missing or looks wrong, raise it with the broker now

- Engage a QoE provider that has done home services deals before

- Use the QoE findings to reset price, working capital peg, or both

Read our Quality of Earnings Complete Guide for the full process. If you want to talk through a specific deal, book a call with our team.

The deals that close at the right number are the deals where someone asked the hard questions before signing the check.