Most owners looking to sell their HVAC company spend months preparing their financials, cleaning up their books, and getting their equipment lists in order before going to market. One thing that often gets overlooked is working capital. You don’t need a finance background to get it right, but you need to know what buyers expect and what happens when those expectations aren’t met.
What Working Capital Actually Is
Working capital is the money your business needs to run day-to-day. You can get this number by taking your current assets, such as:
- Money owed to you from customers
- Parts sitting on your shelves
- Cash on hand
And subtracting from it your current liabilities, like:
- Money owed to vendors
- Unpaid payroll
- Deposits given on incomplete jobs
The result is your working capital. This simple formula of current assets minus current liabilities is a helpful one to keep on hand when reviewing your financials and preparing to sell. It can give you a strong foundation when in negotiations with a buyer.
What Buyers Look for at Closing
When someone buys your business, they’re not just getting your equipment, trucks, and past sales. They’re buying a working company that needs to keep operating smoothly from day one.
Payroll doesn’t pause for ownership transitions. Vendors expect to be paid on the same schedule they always have. Service calls keep coming in.
That’s why buyers pay close attention to working capital. They want to make sure there’s enough cash and other short-term assets in the business to cover everyday expenses after the sale closes.
How the Working Capital Target Gets Set
In most deals, the buyer and seller agree on the level of working capital to include. This amount is called the working capital target, or peg. At closing, the actual working capital in the business is compared to the target. If the business has more working capital than expected, the seller may receive a higher purchase price. If it has less, the purchase price is usually reduced.
The working capital target isn’t a number a buyer picks out of thin air. It’s usually based on your company’s financial history. In most cases, buyers look at your monthly balance sheets from the past 12 months and calculate an average working capital balance.
For HVAC businesses, that calculation gets complicated because business levels can change. Many HVAC companies have more business in the summer months when demand is at its peak. Also, a business with large commercial maintenance contracts might show unearned revenue as a liability until the work is completed. These can have a big effect on the working capital target.
That’s why it’s important to know your own numbers before going to market. If a buyer uses numbers that don’t reflect typical operations, the target could be set higher than it should be. This means you get less money at closing.
By reviewing your working capital trends early, you can spot unusual months, understand the seasonal changes, and be better prepared to negotiate a fair target.
What Happens When Working Capital Falls Short
If the working capital delivered at closing is lower than the agreed-upon target, the purchase price is usually reduced.
For example, your working capital target is $400,000, but the actual working capital at closing is $320,000. That shortfall would reduce the purchase price by $80,000 to make up the difference.
The opposite can happen, although less often. If your business has more working capital than the target at closing, you might receive additional payment.
One common mistake sellers make is changing the way they manage the business between signing the purchase agreement and closing. If you pay vendors earlier than usual, slow collections, or pull extra cash from the business, it can reduce working capital and lead to a lower purchase price. Most purchase agreements require a business to operate as usual, so working capital remains consistent.
What HVAC Sellers Most Commonly Overlook
Most working capital surprises come from a few specific areas.
Accounts Receivable
If you have invoices more than 60 to 90 days old, buyers often treat them as uncollectible and exclude them from the calculation. Review your accounts receivable aging report before you go to market and collect past-due balances. The cleaner your receivables, the fewer disputes you’ll have about what actually counts toward the target.
Inventory
Inventory is a working capital asset, but buyers take a close look. Obsolete parts, equipment ordered for jobs that fell through, and slow-moving inventory all have little value to a buyer. An accurate, current inventory count and cleanup ahead of due diligence can prevent headaches.
Seasonal Timing
Your working capital picture looks different in July than in February. Your historical average may form the basis for the target, but the actual working capital at closing depends on when the deal closes. You can plan and avoid unexpected adjustments when you have a good idea of your normal seasonal patterns.
Deferred Revenue
HVAC businesses with prepaid maintenance agreements often carry deferred revenue on the balance sheet. How that gets treated in the working capital calculation, whether as a liability offset or excluded from the analysis entirely, should be defined early in negotiations rather than debated at the closing table.
How to Get Ahead of the Conversation
Don’t wait until closing to sort out working capital. By that point, your leverage is limited, and you can’t fix any problems.
- Review your working capital position before you even consider buyers. Understand what your trailing 12-month average looks like and where your current balance sits.
- Collect receivables consistently in the months before going to market.
- Keep inventory counts accurate.
- Avoid drawing down cash or accelerating liability payments once a deal is in progress.
- Get the working capital target defined during letter-of-intent negotiations, not during due diligence.
Taking these steps early can reduce the risk of costly disputes and unexpected purchase price adjustments right before closing. The right preparation also means having an advisor in your corner who has handled enough HVAC transactions to know where these issues typically arise. At Business Modification Group, working capital is part of the deal structure conversation from the start, not something we address after a buyer’s team has already framed it to their advantage.
Don’t Let Working Capital Become a Last-Minute Surprise
Working capital may not be the most exciting part of a business sale, but it can have a significant impact on how much you take home at closing. Luckily, most working capital issues are preventable.
The sellers who have the smoothest transactions are typically the ones who understand their company’s numbers before the buyer even starts asking any questions.
If you’re preparing to sell your HVAC company, don’t wait until due diligence to think about working capital. When you understand it, you can protect your purchase price, reduce disputes, and close more easily.
