I'm actually in your same industry but the commercial side and work on our acquisitions so I will throw in my $.02. To help answer this, I would request details of his service contract churn over time as part of your due diligence. You would like to look at several years data if possible but a starting point would be a listing of all current contract with original date of signing, amount, scope of work and expiration. This, compared to his current revenue run-rate for recurring service contract work would help you place a value on this part of the business.

I would carve out the independent "emergency" service work that comes in from folks picking up your name in the neighborhood newsletter, Facebook, etc. as that could be assigned a different value by looking at several years of results there, averaging out cyclicality and assigning value there.

Probably stating the obvious, but regardless of what value you place on these contract a ton of your focus upfront would need to be VERY strong transition process with the seller. Things like joint letter with the seller explaining the transition, introducing you as great HVAC operator with "x" years experience, etc. etc. The seller can also help this transition on the supplier side of the house if you no longer have industry contacts. If the business name is his name that is another layer of risk as you would probably want to transition it to your name or a new business name. Make sure you have access to everything related to the legacy name with social media so you can transition or change this if needed. Pre-negotiate all of these and document with detail in the purchase agreement. These little things that just seem like a pain for a seller after the deal is done are very valuable for you but will likely be an annoyance for them as he is ready to head to the lake or deer lease. But, if done up-front, very few sellers will walk away from a transaction that will close having to do a little post-acquisition integration or transition help to the buyer.

Good luck!

CPA95 has great advice. One thing to add is I'd consider structuring the deal so that some amount of the payout is extended over time and based on the actual revenue you are able to retain from those service contracts and existing client relationships. I would also talk to him about sticking around for awhile in a small advisory role where he can help you when Mrs Jones isn't happy about the change and he can help smooth that over. He may also be useful in helping you catch back up in a world that's changing pretty rapidly from R22 to 410A to propane. Pay him for what he already knows that you may not.

Make part of the payment delayed and pay him a retainer for maybe 24 months which makes him vested in your success and thus willing to help you get established. You may pay more in the end but there's a good chance you'll have a bigger business on the other side.

Both posts above have some great advice ... and I'll add a little insight from someone who has sold several HVAC businesses, big and small, over the years.

In my opinion, a true owner-operated HVAC business has little cash value to an outside buyer. Assuming you have the appropriate license, you can start your own operation for a much smaller investment amount.

The exception to this rule is if that business you're looking at has something that makes it attractive outside of its revenue. For example, a lucrative maintenance contract with a large customer, or an established marketing campaign that produces consistently attractive leads.

This was alluded to above and I'll echo it - when it comes to these owner-operated businesses, the only way it makes sense to buy them is if the seller is assuming some risk. I strongly suggest negotiating an earn-out provision as part of the deal, which allows the seller to ultimately earn a premium for his business, but only if it performs up to "normal" standards. It's not unusual to see these transactions include a cash payment equal to one year of cash flow, plus an earn-out provision conditioned upon maintaining historical revenues, paid out over 1-3 years. This allows the seller to get full value if the business is what he says it is, while protecting you from massive downside.

I'll add one more thing related to disclosing the sale, and disagree with a comment above. I would not go out of my way to alert customers to the change of ownership. Of course, this depends on the size and type of customer we're talking about, but generally speaking you want customers to get used to talking to you before they even realize you're the owner. Making announcements of new ownership to customers just gives them the excuse to potentially shop their account around since they are going to be working with someone new anyway.

Sounds like a win win to me. How can I send you my bank routing information and passwords?