Q1 2026 HVAC Pre-LOI Diligence
Every HVAC acquisition verification a sophisticated buyer should clear before signing a letter of intent — grouped by category, tagged by pillar and severity, anchored to the Q1 2026 HVAC Atlas.
59
Total items
11
Critical · pre-LOI
23
High · post-LOI risk
25
Medium · diligence period
Severity legend
critical Will cause SBA fall-through or a deal break if missed. Verify before LOI.
high Post-LOI repricing risk. Verify in the diligence period or accept the haircut.
medium Diligence-period verification. Will not kill the deal but compounds working-capital and post-close risk.
Category 01 · 3 items
Why:The 1099 Qualifier arrangement is the dominant Q2 SBA fall-through cause (62%); SBA underwriters are treating it as failed license continuity before reaching DSCR.
Check:State licensing portal lookup · payroll register showing the master as a W-2 employee · entity-named licenses on file · no $500–$2,500/month consulting payments to outside individuals.
Fundability
Why:Multi-state operations (e.g. Cincinnati metro covering OH/KY/IN) require separate state masters; coverage gaps are an immediate Transferability finding.
Check:Service-area zip-code map vs state license coverage · master license expiration dates · CE hours documented per state · reciprocity agreements relied on.
Transferability
Why:Commercial accounts with appliances above 50 lbs of refrigerant trigger EPA leak-rate thresholds; missing inspection logs are a strict-liability finding under 40 CFR Part 82 Subpart F.
Check:Annual leak-rate logs for all >50-lb appliances · service ticket history for refrigerant additions · technician 608 cert ID on each ticket.
Fundability
Category 02 · 3 items
Why:IRA credits expired Dec 31, 2025 (P.L. 119-21). Deals with heat pump revenue share above 40% in 2024–2025 carry confirmed pull-forward — presented SDE typically overstates steady-state earnings by 12–22%.
Check:Heat pump unit sales by month 2023–2025 · manufacturer warranty registration data · install vs service revenue mix · post-Jan 2026 monthly install run-rate.
Earnings Quality
Why:AIM Act transition (effective Jan 1, 2025) is depreciating R-410A field-van inventory in 31% of deals; trailing margins blended across the transition overstate forward economics.
Check:Field-van and warehouse inventory list with ship-date by SKU · A2L (R-32, R-454B) vs R-410A unit-cost differential · A2L technician certification roster.
Earnings Quality
Why:Comfort Advisor function (in-home sales/diagnostic) was excluded from owner add-backs in 45% of deals reviewed; it is the most common post-LOI repricing trigger.
Check:Owner time-allocation interview · Comfort Advisor market wage in metro ($65K–$110K loaded) · whether a separate W-2 Comfort Advisor exists.
Earnings Quality
Category 03 · 1 item
Why:FAD (Carrier), TCS (Trane), and Premier (Lennox) status drive 0.5–1.5× of upper-band placement; agreements are not always assignable on change of control.
Check:Dealer agreement language on assignment / change of control · OEM regional rep written confirmation · pricing tier and rebate structure in current contract.
Pricing
Category 04 · 6 items
Why:Headline retention rates can mask churn timing; lenders increasingly require cohort data not blended averages.
Check:Quarterly cohort retention table for trailing 24 months · agreement start dates · ServiceTitan or FieldEdge export of contract status by month.
Pricing
Why:AOR attach above 35% indicates organic upselling; presented attach rates above the band ceiling typically reflect counting-method games.
Check:Service-call dispatch log · agreement-creation timestamps tied to call IDs · sample 30 call records and verify against agreement records.
Pricing
Why:Headline retention rates can mask churn timing; lenders increasingly require cohort data not blended averages.
Check:Quarterly cohort retention table for trailing 24 months · agreement start dates · ServiceTitan or FieldEdge export of contract status by month.
Pricing
Why:AOR attach above 35% indicates organic upselling; presented attach rates above the band ceiling typically reflect counting-method games (e.g. counting trip-charge waives as agreement attach).
Check:Service-call dispatch log · agreement-creation timestamps tied to call IDs · sample 30 call records and verify against agreement records.
Pricing
Why:Recurring revenue share is the dominant top-of-band Pricing determinant; presented share that does not reconcile to bank deposit categorization is a finding.
Check:Trailing 12-month bank deposit categorization · ACH file from Comfort Club billing system · reconciliation memo to General Ledger.
Pricing
Why:Annual-prepaid agreements create a deferred-revenue liability that must transfer to the new entity; cash-basis books often mis-state this and overstate trailing SDE.
Check:Agreement billing terms (annual vs monthly) · cash collected by month · earned vs unearned schedule · purchase-price allocation memo.
Earnings Quality
Category 05 · 5 items
Why:Technicians lacking A2L-jurisdiction certification cannot legally service post-transition equipment; certification gap is a forward labor-cost item.
Check:EPA 608 cert level by tech (Type I/II/III/Universal) · A2L training completion · payroll register cross-check · jurisdiction-specific A2L licensure.
Transferability
Why:Technicians lacking A2L-jurisdiction certification cannot legally service post-transition equipment; certification gap is a forward labor-cost item.
Check:EPA 608 cert level by tech (Type I/II/III/Universal) · A2L training completion · payroll register cross-check · jurisdiction-specific A2L licensure.
Transferability
Why:NATE-certified technicians command 8–15% wage premium and signal a Transferability premium; tenure distribution flags hidden retirement risk.
Check:NATE cert ID per tech · expiration dates · tenure (years with company) · age distribution · trailing-24-month attrition by tenure cohort.
Transferability
Why:A documented training pipeline is the highest-ROI Transferability signal; absence of one is a forward labor-replacement cost item the buyer prices in.
Check:Apprentice register · curriculum or training hours per week · DOL Registered Apprenticeship status if applicable · in-house 608 prep program.
Transferability
Why:Heavy 1099 use can trigger ABC-test or worker-classification audits (esp. CA AB5, NJ, MA) and inflates apparent labor margin while hiding employer tax exposure.
Check:1099-NEC totals 3 yr · per-contractor revenue dependence · scope-of-work agreements · workers comp coverage on 1099 entities.
Earnings Quality
Category 06 · 1 item
Why:Distributor credit lines (Ferguson, Johnstone, Baker) are personally guaranteed by the seller in many SMB deals; loss of terms post-close compresses working capital.
Check:Supplier statements with payment terms and credit limits · personal guarantee disclosures · written confirmation of post-close terms portability.
Transferability
Category 07 · 2 items
Why:Servicing R-32 or R-454B requires UL 60335-2-40 compliant recovery machines and A2L-rated leak detectors; equipment-list gaps signal forward capex and certification cost.
Check:A2L recovery machine model list · A2L leak detector inventory · A2L training completion certificates per tech · supplier receipts for A2L tooling.
Transferability
Why:EPA recordkeeping requires three-year reconciliation between refrigerant purchases, recoveries, and disposals; gaps trigger civil penalty exposure adjusted annually under 40 CFR 19.4.
Check:Refrigerant purchase invoices (3 yr) · recovery cylinder log · reclamation receipts · disposed-cylinder manifest.
Fundability
Category 08 · 3 items
Why:FAD (Carrier), TCS (Trane), Premier (Lennox), and Diamond (Mitsubishi) status drive 0.5–1.5× of upper-band placement; agreements are not always assignable on change of control.
Check:Dealer agreement language on assignment / change of control · OEM regional rep written confirmation · current pricing tier · rebate accrual.
Pricing
Why:Distributor credit lines (Ferguson, Johnstone, Baker) are personally guaranteed by the seller in many SMB deals; loss of terms post-close compresses working capital.
Check:Supplier statements with payment terms and credit limits · personal guarantee disclosures · written confirmation of post-close terms portability.
Transferability
Why:OEM extended warranty programs (e.g. Carrier 10-year parts) reimburse the dealer at fixed rates; under-accrued labor obligations on the books can flip to liability post-close.
Check:Active extended-warranty register by serial number · OEM reimbursement rate sheet · trailing 24-month warranty claim labor cost · accrual entry on balance sheet.
Earnings Quality
Category 09 · 3 items
Why:Service-van replacement at 8+ years requires $35K–$55K each; under-equipped vans (no A2L kit, no GPS) carry forward capex and operational risk.
Check:Vehicle list with VIN, year, mileage, lien status · A2L kit per van · GPS subscription · trailing 36-month repair spend per vehicle.
Earnings Quality
Why:Manometers, combustion analyzers, refrigerant scales, and recovery machines require periodic calibration; missing tooling is forward capex and missing calibration is a code-compliance finding.
Check:Tool list per van · calibration certificates for combustion analyzers and scales · in-shop recovery and reclaim equipment.
Transferability
Why:AIM Act R-410A → A2L transition (effective Jan 1, 2025) is depreciating field-van and warehouse stock in 31% of deals; stranded inventory is a haircut to equipment value.
Check:Inventory list with ship date and SKU · A2L vs R-410A unit count · physical count in shop and vans · 12-month inventory turn ratio.
Earnings Quality
Category 10 · 1 item
Why:Commercial-heavy operators carry 60–90 day AR; underestimating collectibility overstates working-capital target at close.
Check:AR aging by customer 0–30 / 31–60 / 61–90 / 90+ · trailing 24-month bad-debt write-offs · concentration risk per customer above 10%.
Earnings Quality
Category 11 · 1 item
Why:Commercial accounts above 15% of revenue, or any single customer above 10%, materially alter Earnings Quality and Pricing; mix shifts within the trailing period must be normalized.
Check:Top 20 customers by trailing-12-month revenue · residential vs commercial split · install vs service vs maintenance mix · multi-year trend.
Earnings Quality
Category 12 · 3 items
Why:Standard GL alone does not cover R-410A leak liability, asbestos disturbance, or new-construction wrap-up requirements; under-insurance flags forward premium increase or buyer-side gap coverage.
Check:Certificates of Insurance · pollution liability rider · contractors pollution liability (CPL) limits · umbrella policy · loss runs 5 yr.
Fundability
Why:States that license HVAC contractors typically require a surety bond ($5K–$20K); commercial work over a threshold often requires per-project performance bonds.
Check:Active state surety bond · bonding agency relationship · single-project and aggregate capacity · commercial backlog requiring bonds.
Fundability
Why:X-Mod above 1.0 signals injury frequency above industry average and predicts forward premium; modifiers are sticky for 3 years post-close.
Check:NCCI X-Mod worksheet · trailing 5-year claims · OSHA 300 log · safety program documentation.
Transferability
Category 13 · 2 items
Why:Shop, yard, and signage lease is the operational anchor; landlord assignment provisions and below-market rent (if landlord = seller) are common findings.
Check:Lease assignment / change-of-control clause · related-party indicator if landlord shares ownership · market rent comp · remaining term and option rights.
Transferability
Why:HVAC operations historically used solvents, asbestos-laden insulation, and refrigerant cylinder storage; environmental finding can stop SBA financing on real-estate-included deals.
Check:Phase I ESA report (current within 12 months) · UST / AST records · spill or release history · storage of refrigerant cylinders and used oil.
Fundability
Category 14 · 3 items
Why:ServiceTitan, FieldEdge, Housecall Pro contracts often have data-export and termination terms that constrain post-close transitions; loss of historical service history is an Earnings Quality continuity risk.
Check:FSM contract terms · data export rights · monthly active seat count · trailing 12-month uptime / outage log · API access.
Transferability
Why:Callback rate above 8% on installs or 5% on service signals tech-quality issues that materialize as labor cost and reputation drag post-close.
Check:FSM callback report · same-job-revisit rate · trailing 12-month warranty labor cost · tech-by-tech callback breakdown.
Transferability
Why:Google review velocity below 1 per month per metro is a demand-generation finding; sudden negative-review clusters predict commercial fall-out.
Check:Google Business Profile review trend · BBB complaints and resolution · trailing-24-month star-rating trajectory · response rate.
Pricing
Category 15 · 2 items
Why:Mechanic's liens filed against the entity (or filed by the entity) signal commercial collection issues; unreleased UCC-1s on equipment block clean title at close.
Check:Secretary of State UCC-1 search · county-level mechanic's liens · PACER litigation search · state court docket search.
Fundability
Why:OSHA recordable incidents and prior citations carry to the new entity if structured as asset purchase with continuity of operations; high-risk patterns predict insurance and X-Mod increases.
Check:OSHA 300 log 5 yr · citation history · abatement records · ladder / electrical / lockout-tagout program documentation.
Transferability
Category 16 · 1 item
Why:HVAC sales tax rules vary widely (TX taxes labor on real-property repair; FL exempts most labor; CA partial); errors compound at 4–8.25% of revenue and SBA underwriting flags large unrecorded liability.
Check:Sales tax returns 3 yr per state · taxability matrix by state for labor / parts / agreement · audit notices or assessments.
Fundability
Category 17 · 2 items
Why:Multi-month backlog presented as forward revenue must be tested against signed POs and customer creditworthiness; verbal commitments do not survive due diligence.
Check:Backlog schedule with PO numbers · customer credit ratings · scheduled vs realized completion 24 mo · cancellation history.
Pricing
Why:Federally funded jobs (IRA-related rebate work, school-district HVAC, military housing) trigger prevailing-wage and Buy America requirements; non-compliance is a payback liability.
Check:Federally funded contract list · certified payroll records · Buy America compliance documentation · DOL audit history.
Fundability
Category 18 · 17 items
Why:Japanese HVAC contractors require a 管工事業 (piping/HVAC) license issued either by the prefectural governor (single-prefecture) or by MLIT (multi-prefecture). Operating outside the licensed scope or prefecture is a strict-liability finding under the Construction Business Act (建設業法).
Check:管工事業 license certificate · governor- vs minister-issued classification · 一般建設業 (general) vs 特定建設業 (specified, required for subcontracts ≥ ¥45M) · expiration and renewal status · technical engineer (専任技術者) on file.
Fundability
Why:Under the High Pressure Gas Safety Act (高圧ガス保安法), facilities with refrigeration capacity above defined tonnage thresholds require a designated 冷凍機械責任者 (Type 1, 2, or 3) by law. Missing or expired appointment voids commercial servicing rights and triggers METI penalty exposure.
Check:KHK / METI Safety Manager appointment letter · qualification class (1類/2類/3類) match to facility tonnage · annual statutory inspection record · KHK High Pressure Gas Inspection Center filings.
Fundability
Why:Japan's 2015 Fluorocarbon Act requires periodic leak inspections, refrigerant logging, and recovery via certified operators (第一種フロン類充塡回収業者). Penalties run up to ¥500,000 per violation; missing recovery records block commercial-account renewals.
Check:Type-1 Fluorocarbon Filling/Recovery Operator registration · prefectural certification ID · inspection logs by appliance · annual METI report (calculated CO2-equivalent emissions).
Fundability
Why:J-GAAP requires goodwill amortization over up to 20 years (typically 5–10), unlike US GAAP impairment-only treatment. Trailing earnings presented under one regime systematically misstate the other; this is the single largest source of cross-border valuation error.
Check:Audited J-GAAP financial statements (損益計算書 P/L, 貸借対照表 B/S) · goodwill schedule with amortization period · accountant-prepared US-GAAP bridging memo · differences in revenue recognition for installation contracts.
Earnings Quality
Why:JP HVAC distribution is concentrated in the four-OEM bloc (Daikin, Mitsubishi Electric, Mitsubishi Heavy, Hitachi-Johnson Controls). Dealer agreements are typically tied to the 法人 (entity) — cleaner than US transfers — but specialized 特約店 (Tokuyakuten, exclusive dealer) status carries territory and assignment restrictions worth verifying before LOI.
Check:OEM dealer agreement (販売店契約) · 特約店 vs general dealer classification · territory definition (商圏) · change-of-control consent clause · current pricing tier and bonus accrual.
Pricing
Why:JP consumption tax sits at 10% standard / 8% reduced rate; HVAC installation and maintenance are typically standard-rate but partial-period revenue and deferred-installation deposits create reconciliation gaps that compound at 10% of revenue.
Check:消費税申告書 (consumption tax returns) 3 yr · installation deposit liability schedule · invoice-system (インボイス制度) qualified invoice issuer registration number · 簡易課税 vs 本則課税 election.
Fundability
Why:Japan's 終身雇用 (lifetime employment) convention and Article 16 of the Labor Contract Act make termination far harder than at-will US employment. Severance reserves, social insurance employer contributions (社会保険料 ~15% of wages), and statutory retirement pay obligations are often understated on US-style management accounts.
Check:退職金規程 (retirement allowance rule) · 退職給付債務 (retirement benefit obligation) calculation · 社会保険・労働保険 contribution rate per employee · 有期 (fixed-term) vs 無期 (indefinite) employee mix.
Transferability
Why:JP HVAC installations involving 200V wiring or panel work require a 第二種電気工事士 (Class-2 Electrician) license per the Electrician Act (電気工事士法), and the entity itself needs 電気工事業登録 (Electrical Construction Business registration). License-by-tech is not portable across jurisdictions in the way US masters can be.
Check:電気工事士 license per technician · 電気工事業 entity registration certificate · scope of past work requiring electrical credentialing · 主任電気工事士 (chief electrician) appointment.
Transferability
Why:JP SMB acquisitions typically rely on relationship-based regional bank financing (地銀 / 信金) rather than a national SBA-equivalent. Existing main-bank relationships (メインバンク) often hold change-of-control consent rights via loan covenant; loss of the relationship can compress working capital independent of credit metrics.
Check:Main-bank loan agreements with CoC clauses · personal guarantee (個人保証) by selling shareholder · relationship history with regional bank · 信用保証協会 (credit guarantee corporation) coverage · post-close lender continuation letter.
Fundability
Why:Installations in commercial buildings require 建築設備検査 (Building Equipment Inspection) reports filed with the local government every 1–3 years; older installs often predate current code, creating retrofit liability that travels with the customer relationship.
Check:建築設備検査報告書 filings for the trailing 5 years · ventilation / smoke-control system certifications (排煙設備) · code-grandfathering memos for pre-2003 installations.
Transferability
Why:JP corporate transactions require fresh 履歴事項全部証明書 (commercial register full extract) and 印鑑証明書 (registered seal certificate); outstanding director changes or unfiled capital actions are blocking findings at signing.
Check:法人登記簿謄本 (履歴事項全部証明書) issued within 3 months · representative director seal certificate · outstanding capital subscription receivables · prior M&A or capital actions on the registry.
Fundability
Why:Keishinsha certification is individual-based and non-transferable under MLIT rules; departure post-close without a successor in 30 days triggers provisional license suspension and immediate inability to bid on contracts above ¥3M.
Check:Current Keishinsha appointment letter and qualifying credentials · written 12–24 month employment retention agreement signed pre-close · backup-Keishinsha candidate identified in same prefecture · MLIT successor-appointment timeline documented.
Transferability
Why:METI/MOE field surveys (2018–2022) found >60% of fluorocarbon refrigerants remained in disposed AC equipment — systemic non-compliance is the modal case in Japan, not the exception. Inherited record gaps are direct post-close liability under the Fluorocarbon Emissions Suppression Act (¥500K–¥1M per violation, 5-year retention).
Check:Three-to-five years of refrigerant purchase / recovery / disposal logs · METI / prefectural inspection notices · physical sample-test of recovery cylinder count vs logged operations · technician 第一種フロン類充填回収業者 registration status per location.
Fundability
Why:JP OEM dealer agreements explicitly require advance notice of ownership change; reassignment approval runs 60–90 days during which rebate accrual, territorial exclusivity, and partner-tier status may be suspended. Loss of OEM status compresses EBITDA by 200–400 bps (rebates run 5–10% of install revenue and 2–5% of maintenance) and triggers 10–20% customer churn.
Check:OEM partnership agreement assignment clause · written advance notice to OEM regional rep · provisional-status rules during approval window · current rebate accrual schedule · partner-tier (Diamond/Premier/Silver) confirmation in writing.
Pricing
Why:Only ~15,000 active 冷凍機械責任者 (Refrigerating Machine Engineer) certifications exist nationwide (JIRFE, 2024); replacing a departing certified technician runs 6–12 months. Documented post-close cases show 50–70% EBITDA contraction within 2–4 weeks when a key certified tech departs and registration lapses.
Check:冷凍機械責任者 certification by tech (Type 1/2/3) with expiration · 24–36 month retention agreement with primary certified tech · backup-certified-tech identified and trained · METI re-registration application drafted at signing.
Transferability
Why:Japan's Act on the Protection of Personal Information (個人情報保護法 / APPI) requires customers be notified of any transfer of their personal data on M&A and granted opt-out rights; failure invites Personal Information Protection Commission (PPC) scrutiny and customer complaints.
Check:Pre-close APPI privacy-policy review · sample customer-notification letter (email + mail) · post-close notification campaign budget (¥2–5M per 10K customers) · PPC reporting protocol if material breach.
Transferability
Why:JP HVAC technicians typically specialize in single-OEM systems (Daikin OR Mitsubishi OR Panasonic) due to manufacturer-proprietary training academies. Multi-OEM platforms require ¥5–20M per platform in cross-training to reduce single-OEM concentration risk.
Check:Technician OEM-certification matrix (per tech, per OEM) · proprietary training academy enrollment costs · OEM-mandated installer/service-partner tier requirements · post-close cross-training budget and 12–24 month timeline.
Transferability
