PE firms almost always propose a deal structure that looks generous on paper. Most HVAC owners don't realize until after close that they left 20–40% of their deal value on the table — not through bad negotiation, but through not understanding what they actually agreed to. The headline number the PE firm presents isn't the number you'll receive. It's a composite of several very different financial instruments, each with different risk profiles and different probabilities of paying out in full.
This isn't about being suspicious of buyers. Reputable PE firms operate professionally and intend to honor their commitments. It's about knowing exactly what you're signing — before the LOI is where structure is first proposed, and the leverage you have to negotiate disappears once you've signed it.
What “Deal Structure” Actually Means
Every HVAC PE deal has a total consideration number — the headline price the buyer and seller agree to. That number is almost never paid in a single lump sum at closing. It's distributed across three distinct buckets, each with different certainty levels:
Cash at close
Wire transfer on closing day. Guaranteed (within the constraints of working capital adjustments and escrow holdbacks).
Seller notes / deferred payments
Structured loan from you to the buyer. Interest-bearing, but subordinated to acquisition debt and conditional on the business's financial health post-close.
Earn-out
Future payments tied to performance targets. Paid only if specific metrics are hit after close — under conditions you no longer fully control.
Most sellers focus entirely on the headline number without asking which bucket it's in. This is where value gets lost.
Cash at Close — The Only Number That's Real
Cash at close is the only guaranteed component of deal consideration. It's the wire transfer that hits your account on the day of close. Everything else — seller notes, earn-outs, rollover equity — carries some form of contingency or future risk.
In a typical mid-market HVAC PE deal, cash at close is 60–80% of the headline number, not 100%. The remaining 20–40% is deferred through a combination of seller notes, earn-outs, and rollover equity. Sellers who don't understand this structure often negotiate to maximize the wrong number.
Two additional mechanisms reduce the actual cash received at close:
Working capital peg
Every deal defines a “target working capital” — the level of current assets minus current liabilities the buyer expects to receive with the business. If your actual working capital at close falls below that target, the purchase price adjusts downward dollar-for-dollar. This adjustment is calculated post-close and can reduce cash received by hundreds of thousands on a mid-market deal.
Escrow holdback
3–10% of total deal value is typically held in escrow for 12–24 months as a reserve for indemnification claims. If the buyer makes a claim under your representations and warranties during the escrow period, the amount is deducted before the holdback is released to you.
Watch for
The headline EBITDA multiple is almost always applied to total consideration — cash + deferred + earn-out. Ask specifically: what is the cash-at-close multiple? A “6x EBITDA” deal with 35% deferred is a 3.9x cash-at-close deal.
Seller Notes — Deferred, Subordinated, Risky
A seller note means you're lending the buyer part of their purchase price. You are a creditor of the business you just sold.
Seller notes in HVAC PE deals typically carry 5–8% interest over a 3–5 year term. That sounds reasonable — better than cash sitting idle, better than some market alternatives. The risk isn't the interest rate. It's the subordination.
Your seller note is almost always subordinated to the acquisition credit facility — the bank debt the PE firm used to buy your business. Subordination means the bank gets paid first if the business has difficulty servicing debt. You're last in line. If the PE-backed entity hits financial stress, the bank continues receiving payments. Your seller note payments stop.
Watch for
If the buyer has trouble servicing the acquisition debt, your seller note payments stop. You've now become a junior lender to the company you just sold — without any of the governance rights a real lender would have negotiated.
The Deferred Consideration Trap
An HVAC seller accepts a deal: $12M headline price. $7.2M cash at close. $1.8M seller note. $3M earn-out over 3 years. Two years later, the PE-backed entity misses revenue targets — partly due to integration decisions the seller had no control over. Earn-out: $0. Seller note: paused pending debt service. Actual realized value: $7.2M — 60% of the “agreed” price.
This scenario is not exceptional. It is common. The seller negotiated well on headline price and signed a deal that looked like a win. The deferred components — which represented 40% of total consideration — were tied to outcomes they stopped controlling on closing day.
Earn-Outs — When They Work, When They Don't
Earn-outs aren't inherently bad structures. They can bridge valuation gaps and give sellers upside they wouldn't otherwise receive. The problem is how they're typically structured in HVAC PE deals. See our existing earn-out structures overview for the full mechanics. Here's the framework for when to accept one and when to push back.
When earn-outs make sense
You're genuinely staying in an operational role post-close. Earn-out targets are based on metrics you control directly — service agreement count, technician headcount, or specific operational milestones — not revenue or EBITDA managed by new owners. The measurement period is short (12 months maximum). And the earn-out represents less than 15% of total deal value. When all four conditions are true, an earn-out is a reasonable structure.
When earn-outs destroy value
Targets are based on revenue or EBITDA you won't control post-close — subject to new management decisions, integration costs, and capex allocation made without your input. The measurement period is 2+ years. Or the earn-out represents more than 25% of deal value. In these scenarios, you've sold a large portion of your business for a conditional promise tied to decisions you can no longer influence.
What to negotiate
Push for shorter earn-out periods — 12 months is defensible, 24+ months is a red flag. Insist on carving out only the metrics you'll directly control post-close. Require quarterly measurement rather than annual — annual measurement compounds the risk that one bad quarter erases a year's progress with no recourse. And cap any changes in accounting methodology during the earn-out period. Buyers can reclassify costs to deflate the earn-out base without changing underlying performance.
Before you negotiate deal structure, know your EBITDA baseline.
Your negotiating position on earn-outs and cash at close depends directly on your PE Readiness Score. HVAC owners with strong fundamentals can push for more cash at close. Get both numbers free.
Get Your EBITDA Baseline & PE Readiness Score →How to Compare Two Competing Offers
When you have multiple offers — or when you're evaluating whether to push back on a single offer's structure — the comparison framework below converts every offer to a risk-adjusted number. This is the only meaningful basis for comparison. See our guide to negotiating across all five deal levers for the broader context — deal structure is one of those levers, and this post is the deep dive on it.
Convert every offer to a 'walk-away cash' number
Cash at close, minus the working capital adjustment, minus the escrow holdback. This is the money you actually receive on closing day. Everything else is conditional.
Apply a probability discount to earn-outs
Industry data on service business earn-out achievement rates suggests 40–60% probability of full payout. Apply that discount to the earn-out headline figure. A $3M earn-out is worth $1.2M–$1.8M in expected value — not $3M.
Apply a subordination discount to seller notes
Seller notes carry default risk proportional to their term and subordination depth. A rough approximation: discount 5–10% per year of term to account for the probability that debt service issues interrupt payments.
Compare risk-adjusted totals — not headline numbers
Offer A: $10M, all cash at close. Offer B: $12M headline — $7M cash, $2M seller note (3-year term), $3M earn-out. Risk-adjusted: Offer A = $10M. Offer B = $7M + $1.7M (seller note at ~85% after subordination discount) + $1.5M (earn-out at 50%) = ~$10.2M. Nearly identical. But Offer B carries execution risk that Offer A doesn't.
Three Negotiating Levers Most Sellers Miss
Most sellers negotiate on earn-out percentage and seller note interest rate. These three structural provisions protect far more value — and most PE firms won't volunteer them.
Accelerated earn-out triggers
Negotiate specific early-achievement milestones that vest the full earn-out immediately. If service agreements cross a defined threshold in year one, or EBITDA hits a specific number six months ahead of schedule, the remaining earn-out balance pays out at that trigger point. PE firms will resist this, which tells you something about how confident they are in your ability to hit targets.
Change-of-control earn-out protection
If the PE firm sells the business during the earn-out period — to another PE firm, a strategic buyer, or through a merger with another portfolio company — the remaining earn-out balance vests 100% at the close of that transaction. Without this protection, your earn-out can evaporate in a secondary sale that you had no say in.
Anti-dilution on earn-out base
A specific provision that prevents the buyer from loading new operating costs into the earn-out calculation period. Integration expenses, new hires brought in from the platform, capex decisions made at the PE level — these should be explicitly carved out of the EBITDA base used to measure earn-out achievement. Without this, the buyer controls the denominator.
Frequently Asked Questions
What percentage of HVAC PE deals include an earn-out?
Roughly 60–70% of mid-market HVAC PE deals include some form of deferred consideration. Earn-outs specifically represent 15–30% of total deal value in most mid-market HVAC transactions. The prevalence increases with deal complexity — platform acquisitions at higher multiples are more likely to include earn-out structures.
Is a seller note the same as owner financing?
Effectively yes — you are financing part of the buyer's purchase price. The difference is that seller notes in PE deals are almost always subordinated to the acquisition credit facility. This means if the business struggles to service its senior debt, your seller note payments stop. Owner financing in a direct sale often doesn't carry this subordination risk.
What's a reasonable working capital peg?
Industry standard is trailing 12-month average working capital. Push back hard on any peg calculated from a seasonally high month — HVAC has obvious peak-season working capital that can inflate the target significantly. The peg should reflect normalized operations, not peak inventory or accounts receivable from a summer surge.
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.