Two HVAC owners. Same market, same year, same headline LOI number: $8.5 million. Both signed on the same week in January. Both had M&A advisors. Both were selling to PE roll-up platforms with similar track records.
Six months later, Seller A wired $6.2 million. Seller B wired $4.1 million.
This isn't a horror story. Nobody got defrauded. Both deals closed. The gap was structural — built into the LOI before either seller fully understood what they'd agreed to. Seller B took a higher headline number with worse structure. Seller A took the same headline with better structure. The math played out exactly as it was written.
Most HVAC sellers fixate on the multiple — the 6x or 7x EBITDA number at the top of the LOI. But how that number gets paid out matters almost as much as what it is. An $8M deal at 80% cash at close is worth more than a $9M deal at 50% cash + 30% earnout + 20% rollover equity — especially if the earnout has aggressive conditions and the rollover is in a platform that underperforms.
This post explains each component, what it means for you, and how to negotiate from the seller's side. We'll come back to Seller A and Seller B at the end.
The Three Components of Every HVAC Deal
Every HVAC PE deal has three potential payment levers. Understanding each one — how it works, who it benefits, and when it pays out — is the foundation of negotiating from a position of knowledge.
Component 1: Cash at Close
The wire you get on day one.
Cash at close is certain. No future conditions, no platform risk, no PE hold period. Once it clears the wire, it's yours regardless of what happens to the business afterward. The benchmark: PE platforms typically offer 70–85% cash at close for platform acquisitions. Add-ons sometimes come in higher. Anything below 70% should be flagged and negotiated — the remaining amount is deferred consideration tied to conditions you don't fully control.
Component 2: Earnout
Deferred consideration tied to hitting future performance targets.
Earnouts are structured as a promise: hit a revenue or EBITDA threshold over the next 12–36 months and receive an additional payment. In theory, they increase total deal value. In practice, the conditions are where sellers lose money.
Key mechanics to understand: the length (12–18 months is manageable; 24–36 months exposes you to years of variables), the metric (revenue is cleaner than EBITDA — the buyer has far less ability to manipulate revenue through cost allocation, pricing changes, or staffing decisions), the measurement period (trailing 12 months is standard; watch for single-year caps that reset to zero), and what happens if the buyer changes pricing, territory, or staffing that affects your ability to hit the number.
The Earnout Reality Check
An earnout is a promise to pay you more if you keep running the same business under someone else's control. Most HVAC sellers are surprised how fast the conditions become difficult to hit — not because of fraud, but because the buyer's operational decisions (pricing changes, service territory adjustments, staffing reorganizations) affect the inputs that determine whether you hit the target. The earnout is theirs to manage. The metric is yours to negotiate.
Component 3: Equity Rollover
Retaining 10–20% equity in the acquiring platform for a “second bite.”
Instead of cashing out 100% at close, you retain a minority equity stake in the PE platform. The premise: when the platform is sold or recapitalized in 5–7 years, your rollover equity participates in the exit at (ideally) a higher multiple. It can be genuinely lucrative if the platform performs.
But you're now a minority equity holder in a company you don't control, on a timeline you don't set. The key questions: What is the implied valuation at rollover — i.e., what multiple is being applied to calculate what your equity stake is “worth”? What are the liquidation preferences — senior equity holders get paid first at exit; your rollover equity may be subordinate. And what happens if the platform sells at a lower multiple than the implied rollover value?
How PE Buyers Use Each Component
Every element of deal structure serves a purpose for the buyer. This isn't cynicism — it's context. Understanding why PE structures deals the way they do is how you negotiate intelligently instead of reactively.
Why buyers minimize cash at close
PE buyers preserve capital for add-on acquisitions and integration spend. A PE platform that pays 85% cash at close on every acquisition has less dry powder for the next deal. Every dollar in earnout or rollover is a dollar they don't have to finance or draw from their fund at close. Minimizing upfront cash isn't just about risk — it's capital efficiency.
Why buyers propose earnouts
Earnouts bridge valuation gaps. The buyer's model says your EBITDA will drop 15% post-close (owner transition, customer concentration risk, seasonal normalization). You believe it won't. The earnout is the buyer saying: “You're confident — put money on it.” They also use earnouts on owner-dependent businesses to reduce the risk that revenue walks out the door when the founder does.
Why buyers push for rollover equity
A seller with equity in the platform is motivated post-close. They help with integration, customer transitions, team retention, and institutional knowledge transfer. Rollover equity aligns incentives. It also reduces cash outlay at close — a seller who rolls $1M in equity is effectively financing part of their own acquisition.
The Asymmetry That Matters
PE buyers have done 30–50 of these deals. Most HVAC sellers do it once. The structure isn't random — every component serves a purpose for the buyer. Understanding that purpose is how you negotiate. The goal isn't to reject every earnout or rollover — it's to understand what you're agreeing to so you can negotiate terms that make them work in your favor.
When Each Structure Makes Sense for the Seller
Structure preferences aren't universal — the right answer depends on your situation. Here's the framework for thinking through each component before you sit across from a PE buyer. (Before signing any LOI, understand which terms are locked in at that stage.)
Maximize Cash at Close When…
- You're retiring and don't need or want ongoing operational involvement
- The platform has a short hold history, a recent PE recapitalization, or an unclear exit track record
- Your business is highly owner-dependent and you're genuinely stepping back post-close
- The earnout conditions would require staying engaged without the authority to make the decisions that affect the outcome
Accept an Earnout When…
- It's structured on revenue, not EBITDA — EBITDA is subject to too many buyer-controlled inputs
- The measurement period is 12–18 months, not 24–36
- The conditions are things the buyer cannot change unilaterally — pricing, service territory, staffing levels
- The earnout bridges a specific, quantifiable valuation gap — not a vague “performance” target
Consider Rollover Equity When…
- The platform has a clear PE exit pathway in 3–5 years, not an open-ended hold structure
- You believe in the roll-up thesis and the operator running the platform post-close
- The implied rollover valuation is reasonable — not inflated to make the “second bite” look attractive while leaving you underwater at any realistic exit
- You want to stay involved in the business at a strategic level post-close
The Working Capital Peg — The Most Overlooked Component
Most HVAC sellers spend weeks negotiating the headline multiple and miss the mechanism that quietly adjusts their closing wire by hundreds of thousands of dollars. The working capital peg is the dollar-for-dollar adjustment made post-closing based on the business's actual working capital versus an agreed target.
Here is how it works: at LOI, buyer and seller agree on a “target” working capital level — typically defined as the normal operating level of current assets minus current liabilities over the trailing 12 months. After close, actual working capital is measured against that target. If you're below target, it's a dollar-for-dollar deduction from the wire. If you're above, you receive the surplus.
For HVAC businesses, this matters because working capital fluctuates seasonally. A sale that closes in October — post-summer peak, pre-winter heating surge — might show inflated accounts receivable and low accounts payable compared to the annual average. If the peg was set based on a different seasonal baseline, the post-close settlement can produce a $150K–$400K adjustment that most sellers never modeled.
| Scenario | Working Capital vs. Peg | Impact on Wire |
|---|---|---|
| Closes in October (post-peak) | Actual WC above peg by $280K | +$280K surplus paid to seller |
| Closes in March (pre-season) | Actual WC below peg by $210K | −$210K deducted from wire |
| Peg negotiated using peak-season average | Peg set too high vs. normalized WC | Consistent shortfall; seller always pays |
Negotiate the Peg at LOI — Not After
The working capital peg is where many HVAC deals close lower than the LOI. Buyers know exactly how to set the target to create a post-close adjustment in their favor. Model your actual working capital by month for the trailing 12 months, identify the normalized average, and negotiate the peg based on that number before you sign. Attempting to renegotiate after the LOI is signed is an uphill battle you are unlikely to win.
The Three Questions to Ask Before Signing the LOI
Most HVAC sellers evaluate the LOI headline number and the exclusivity period. Here are the three structural questions that determine what actually clears the wire.
- 1
What percentage of the total deal value is cash at close?
Get this number explicitly. Any unallocated amount is deferred — find out what conditions it's tied to and on what timeline. A deal described as “$8.5M” that is actually $4.7M cash + $2.1M earnout + $1.7M rollover is a fundamentally different transaction than the headline implies. The cash at close percentage is the first number to establish.
- 2
If there's an earnout, what metric is it tied to — and who controls that metric?
Revenue over EBITDA. Short duration over long. Seller-controllable metric over platform-controlled. If the earnout is tied to EBITDA and the buyer retains pricing authority, territory allocation, and staffing decisions — all of which affect EBITDA — you are betting on their management choices, not your own performance. Ask specifically: what decisions, post-close, could the buyer make that would prevent you from hitting the earnout target?
- 3
What is the implied valuation for my rollover equity, and what are the liquidation preferences?
If you're rolling $1M at a 6x implied platform valuation into a PE platform that ultimately sells at 5x, your rollover equity is worth less than you put in. Ask for the implied platform valuation at rollover in writing. Ask where your equity sits in the capital structure relative to the PE fund's preferred return hurdle. A “$1M rollover equity position” at the wrong implied valuation with senior liquidation preferences can be worth considerably less than $1M at any realistic exit.
Know your EBITDA multiple before any deal structure conversation.
Deal structure negotiations start from your EBITDA baseline. Run the free HVAC valuation calculator to understand your range — so you know whether the headline number is competitive before evaluating how it's structured.
Run the Free Valuation Calculator →Back to the Two Sellers
Here is exactly what happened to Seller A and Seller B.
Seller A negotiated 82% cash at close ($6.97M), a 12-month revenue earnout (up to $850K if revenue held flat), and no rollover equity. He didn't hit the full earnout — the buyer made territory adjustments in month 8 that affected Q4 revenue. He collected $1.23M of the $850K potential earnout. Total: $6.2M wired at close + $1.23M earnout = $7.43M total.
Seller B took the higher headline number — 55% cash at close ($4.68M), a 25% earnout tied to EBITDA ($2.13M if targets were hit), and 20% rollover equity at an implied 7x platform valuation ($1.70M notional equity). The buyer changed the pricing model in month 4, which affected margins. The EBITDA earnout triggered at zero. The rollover equity, at a platform that later sold at 5.2x vs. the 7x implied valuation, recovered roughly $1.1M after liquidation preferences were applied. Total: $4.1M wired at close + $0 earnout + $1.1M rollover proceeds = $5.2M total.
Same $8.5M LOI. Seller A: $7.43M total. Seller B: $5.2M total. A $2.23M gap from structure alone.
Seller B wasn't deceived. The earnout terms and rollover mechanics were in the LOI. The implied valuation math was available. The conditions were written down. He just didn't model them before he signed. An experienced M&A advisor who had run HVAC PE deals before would have flagged every one of these issues at the LOI stage — before the exclusivity clock started and the leverage shifted.
The Principle That Governs All of This
The number that matters is what clears the wire on day one. Build your structure from there.
Frequently Asked Questions
What percentage of cash at close should I expect in an HVAC PE deal?
PE platforms typically offer 70–85% cash at close for platform acquisitions. Add-on acquisitions sometimes come in higher. Any deal below 70% cash at close should be flagged and negotiated — the remaining amount is deferred consideration with conditions attached.
Are earnouts common in HVAC PE deals?
Yes — earnouts are used in a significant portion of HVAC PE deals, typically to bridge a valuation gap between what the buyer thinks the business will earn post-close and what the seller believes. The key negotiation is the metric (revenue is cleaner than EBITDA), the measurement period (12–18 months is better than 24–36), and who controls the inputs that determine whether you hit the target.
What is equity rollover in an HVAC sale?
Equity rollover means the seller retains 10–20% equity in the acquiring PE platform rather than cashing out 100% at close. The upside is a "second bite" when the platform is sold or recapitalized — typically in 5–7 years. The risk is that you're a minority holder in a company you don't control, on a timeline you don't set. The key questions are the implied rollover valuation and whether the platform has a realistic exit pathway.
What is the working capital peg and how does it affect my payout?
The working capital peg is the mechanism that adjusts your final cash-at-close amount after closing based on actual working capital vs. a negotiated target. For HVAC businesses — which have seasonal cash flow patterns — this adjustment can be $150K–$400K in either direction. The peg should be negotiated at LOI, not after. Model your working capital by month before you sign anything.
OffRamp is a free valuation tool for HVAC business owners. We don't sell your information, represent buyers, or work on commission. The calculator and reports are educational tools — always consult a licensed M&A advisor before entering a sale process.