5 Things You Must Verify Before Evaluating a Service Business for Acquisition

Before you evaluate: understand how service businesses are priced

Service businesses under $5M in revenue are almost always priced on a multiple of Seller's Discretionary Earnings (SDE). Above $5M, valuation shifts to EBITDA multiples. Typical 2025 ranges by vertical: residential HVAC 2.5x–4.0x SDE, commercial HVAC 4.0x–6.0x EBITDA, plumbing 2.5x–3.75x SDE, pool service (route-based) 3.5x–4.5x SDE, pest control (recurring) 4.0x–6.0x SDE, electrical 2.5x–4.0x SDE, landscaping maintenance 2.5x–3.5x SDE, roofing project 1.75x–2.5x SDE.

These ranges are wide on purpose — where a specific deal lands inside the range is decided by the five factors below. Get them right and you buy a bankable, scalable business. Get them wrong and you overpay for a job.

1. SDE quality — not just SDE size

Sellers love a big SDE number. Smart buyers care about how clean it is. Add-backs above 15% of SDE are a yellow flag; above 25% require a formal Quality of Earnings review before you go any further.

Standard legitimate add-backs: owner W-2 salary, owner payroll taxes, owner health insurance, personal auto, personal cell phone, one-time legal or consulting fees, non-recurring equipment purchases expensed instead of capitalized.

Add-backs that get rejected by SBA underwriters: 'gray cash' revenue, family member ghost salaries, undocumented expenses, depreciation (it is real), interest (you will have your own), and 'I just felt like running this through the business'.

Verify owner compensation, personal expenses, and one-time items line-by-line against three years of tax returns. The number on the CIM is a marketing number. The number a lender will fund is usually 10–20% lower.

2. Customer concentration

If a single customer represents more than 15% of revenue — or the top five customers represent more than 40% — your SBA lender will discount the valuation, demand a personal guarantee carve-out, or refuse the deal entirely. Concentration is the number-one risk small-business lenders underwrite around.

Service businesses with thousands of small recurring residential accounts (pool routes, pest control routes, HVAC maintenance memberships) are dramatically more bankable than businesses leaning on a handful of commercial property managers or general contractor relationships.

Always pull a customer concentration report by revenue for the trailing 36 months, not just the trailing 12. A concentration problem that 'just appeared this year' is often a concentration problem the seller managed to hide.

3. Owner dependency — are you buying a business or a job?

Does the owner personally run sales? Hold all the technical licenses? Have every key customer relationship in their personal phone? Personally close every estimate above $5K? That is not a business — that is a high-paying job that disappears the day they leave.

What you want to see: a documented org chart, a #2 (general manager or operations manager) already in place, at least one licensed manager or RME who is not the seller, a CRM that contains the customer relationships (not a notebook), and standard operating procedures for dispatch, estimating, and collections.

If the business is heavily owner-dependent, you can still buy it — but you must negotiate a 6–12 month consulting agreement, a longer non-compete, a larger seller note on standby, and a price reduction reflecting transition risk.

4. Recurring vs project revenue mix

Maintenance contracts, service agreements, route-based revenue, and recurring memberships are worth meaningfully higher multiples than project-based revenue. A pool service company with 800 monthly residential accounts trades at 3.5–4.5x SDE. A project-heavy pool-build company with the same SDE trades at 2.0–2.8x — because next year's revenue has to be re-won from scratch.

Ask for a revenue decomposition: % recurring contract, % repeat customer non-contract, % one-time project, % referral-driven. The higher the contracted and repeat percentages, the more bankable the business and the higher the multiple you can justify paying.

5. Licensing, bonding, and regulatory transfer risk

HVAC, plumbing, electrical, pest control, roofing, and many pool service companies require state-level contractor licenses. In almost every state, the license is tied to an individual (the Qualifier or Responsible Managing Employee), not the business entity.

Before you sign an LOI, confirm three things in writing: (1) whether the license transfers with the business or whether you/an employee must qualify, (2) whether the qualifier is willing to remain employed during transition, and (3) whether the bond is assumable or must be re-underwritten.

We have personally seen deals collapse 72 hours before close because nobody checked the state contractor board. Make license transfer a closing condition in your LOI — never a post-close cleanup item.