The LOI feels like the finish line. It's not. It's the starting gun for the hardest part of the process: due diligence.
After you sign the LOI, the PE firm deploys a team — often including an external Quality of Earnings (QoE) firm — to systematically verify every claim you made about your business. They have 60–90 days of exclusivity to find problems, and they use all of it.
Understanding what they check — and preparing for it — is the difference between a smooth close and a retrade that costs you $500K–$1.5M.
A retrade is when the buyer comes back after diligence and reduces the offer price, citing issues they "discovered." Some retrades are legitimate. Many are negotiating tactics enabled by sellers who weren't prepared.
1. Financial Due Diligence (Quality of Earnings)
This is the centerpiece. The QoE firm will rebuild your income statement from scratch using your source documents — bank statements, invoices, payroll records. They're looking for:
Normalized EBITDA — stripping out owner perks, one-time expenses, and non-recurring items to get to the real run-rate earnings
Revenue quality — are customers paying on time? What's the write-off rate? Are there any side arrangements not in the books?
Working capital — what's the normal level of AR/AP/inventory? This affects closing adjustments
Capex patterns — are there deferred maintenance items that represent future liabilities?
Addback scrutiny — every addback you claimed will be challenged and must be documented
QoE typically takes 4–6 weeks. Your job is to be responsive — slow responses to diligence requests create doubt and extend the timeline.
2. Customer and Revenue Analysis
PE buyers want predictable revenue. They'll pull a detailed analysis of your customer base:
Customer concentration — if your top 5 customers are 40%+ of revenue, expect a discount or an earnout tied to retention
Contract analysis — which customers have signed maintenance agreements? What are the renewal rates? Are contracts transferable?
Revenue cohorts — are customers from 3 years ago still active? Growth from new vs. existing customers?
Seasonality — how consistent is revenue month-to-month? How does slow season look?
3. Operational Due Diligence
PE firms are buying a business they need to operate and grow. They'll assess whether the operation can function without you:
Management team depth — who runs the field operations? Who handles dispatch, scheduling, billing? Are these people documented employees or informal helpers?
Field service software — they'll request a data export from ServiceTitan or equivalent. They want to see job history, technician KPIs, conversion rates
Documented SOPs — are there written processes for key operations, or does everything live in the owner's head?
Fleet and equipment — condition of trucks, HVAC equipment inventory, maintenance records
Subcontractor vs. employee mix — heavy subcontractor use raises questions about stability and classification risk
4. Legal and Compliance Due Diligence
Legal due diligence can surface issues that kill deals or require escrow holdbacks. Key areas:
Licensing — is the Qualifying Party properly tied to the business entity? Is every license current and transferable?
Litigation — any pending or threatened claims? Worker comp disputes? Customer claims?
Environmental — any EPA notices? Refrigerant handling records? Site contamination history?
Contracts — are supplier and customer contracts assignable to the new owner?
Employment — I-9 compliance, any classification issues, non-competes with key employees
Licensing is the most common deal-killer in HVAC transactions. If your Qualifying Party is a key employee or the owner personally — and not properly tied to the legal entity being sold — you need to resolve this before you go to market, not after the LOI.
How to Prepare: The Pre-Diligence Checklist
The best time to run your own diligence is 6–12 months before you want to close. Walk through the same checklist the buyer will use. Fix what you find. Then go to market.
Sellers who prepare for diligence in advance close faster, retrade less often, and negotiate from strength when issues do come up — because they already know what they are.
The OffRamp calculator walks through the same factors PE buyers evaluate during diligence. Use it to understand where you stand before anyone else does.
OffRamp is a valuation tool, not a licensed financial advisor. Results are estimates based on market data and should not be used as the sole basis for any business decision. Always consult with a qualified M&A advisor before entering a sale process.