The $300K Valuation Gap: Why Two Identical Contractors Get Wildly Different Offers
Two contractors. Same revenue. Same profit. One sells for $750K. The other for $1.05M. The difference isn't luck—it's what buyers actually value.
Picture two HVAC companies. Both do $4 million in annual revenue. Both show $300,000 in owner earnings. From the outside, they look identical. But when they go to market, one gets a 2.5x multiple and sells for $750,000. The other commands 3.5x and closes at $1,050,000.
That's a $300,000 difference from the exact same bottom line. And it happens every day in the trades.
The gap has nothing to do with revenue and everything to do with how that revenue is generated—and how likely it is to keep showing up after the owner leaves.
Company A: The $750K Exit
Company A does $4M in revenue. The owner is the primary salesperson—he prices every job and closes every deal. Revenue is 80% installation work: new systems, replacements, add-ons. The company has a handful of service agreements but they're an afterthought. Financials are done by a bookkeeper who gives the owner a P&L once a quarter. The team is solid but there's no operations manager—everything flows through the owner.
A buyer looks at this and sees risk everywhere. What happens to revenue when the owner's relationships go away? Where's the predictable income if installation demand softens? Who runs this thing on day one post-close?
The multiple reflects that risk: 2.5x SDE. $750,000.
Company B: The $1.05M Exit
Company B also does $4M. But the revenue mix looks different: 40% installations, 35% service and repair, 25% maintenance agreements. There are 800 active service contracts generating predictable monthly revenue. The owner focuses on strategy while an operations manager handles day-to-day dispatch and customer issues. Two senior techs handle sales calls. Financials are clean—monthly P&Ls, job costing by project, 3 years of organized tax returns.
A buyer looks at this and sees a machine. Recurring revenue, management in place, clean books, diversified customer base. The risk is substantially lower.
The multiple reflects that stability: 3.5x SDE. $1,050,000.
What's Driving the Multiple?
The valuation multiple isn't a random number. It's a risk score. Every factor that reduces risk for the buyer pushes the multiple up. Every factor that increases risk pulls it down.
| Factor | Company A (2.5x) | Company B (3.5x) |
|---|---|---|
| Revenue mix | 80% install / 20% service | 40% install / 35% service / 25% agreements |
| Recurring revenue | ~$200K | ~$1M |
| Owner in sales? | Yes—primary closer | No—team handles it |
| Ops manager? | No | Yes |
| Financial clarity | Quarterly P&L from bookkeeper | Monthly P&L, job costing, clean returns |
| Customer concentration | Top 5 clients = 40% of revenue | No client > 3% of revenue |
The multiple is a risk score. Every factor that reduces buyer risk pushes the multiple up. Every factor that increases risk pulls it down.
Where Most Contractors Sit
If you're being honest with yourself, you probably look more like Company A than Company B. Most trade contractors do. It's not because they're bad operators—it's because nobody told them these are the metrics that matter for valuation.
The median HVAC company in 2025 shows owner's discretionary earnings of about $315,000, representing roughly a 25% SDE margin on revenue. That's actually strong. The problem is that most of these businesses can't demonstrate the stability factors—recurring revenue, management depth, clean books—that would earn them a premium multiple.
And here's the kicker: improving these factors doesn't just help you at exit. They make your business more profitable and less stressful right now. Building recurring revenue creates predictable cash flow. Hiring an ops manager frees your time. Cleaning up financials gives you real visibility into where you're making and losing money.
How to Close the Gap
Moving from Company A to Company B isn't a weekend project. It typically takes 18-36 months of focused work. Here's where to start:
First 6 months: Clean up financials. Get monthly P&Ls. Implement job costing if you don't have it. Understand your real margins by job type. Separate personal expenses from the business.
Months 6-12: Launch or expand a service agreement program. Set a target of converting 30% of installation customers to maintenance contracts. Train techs to sell agreements on every call.
Months 12-24: Hire or promote a field operations manager. Start removing yourself from daily dispatch and customer-facing roles. Document your sales process so others can execute it.
Months 24-36: Let the machine run. Prove to yourself—and future buyers—that the business performs without you at the center of everything.
The Bottom Line
The $300,000 gap between Company A and Company B isn't about working harder or doing more volume. It's about building a business that's transferable—one where the value lives in the systems, the customer relationships, and the recurring revenue, not in the owner's head and Rolodex.
Whether you plan to sell in 3 years or 30, every dollar you invest in these factors earns a return. Through a higher multiple at exit, through better cash flow today, and through a business that doesn't require you to be on call 24/7.
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