Calculating Working Capital for HVAC Deals

The working capital HVAC deal surprise most sellers miss

Imagine this: you’ve negotiated a purchase price of $2.1 million for your HVAC business. You’ve shaken hands with the buyer. Your attorney has the paperwork ready. Then, three days before close, the buyer sends over a final closing statement — and the wire amount is $147,000 less than you expected.

So what happened?

The working capital HVAC deal adjustment happened. And in our experience, it’s the single most misunderstood part of any working capital HVAC deal — not because it’s unfair, but because most sellers have never heard of it before the deal is nearly done. Whether you’re selling your HVAC business in Illinois or anywhere else, understanding this mechanism before you start talking to buyers is critical.

This post explains exactly what a working capital HVAC deal adjustment involves, how a peg is set, and how the closing calculation works. Read it once and you’ll never be caught off guard at the closing table.

“Working capital isn’t just a line item. For an HVAC owner, it’s the difference between leaving the business with the number you expected — or a number you didn’t.”

What is working capital?

Working capital is the money tied up in the day-to-day operations of your business — the cash needed to keep the lights on, pay your techs on Friday, and fulfill the jobs already booked before new revenue comes in the door.

Essentially, the classic textbook definition is simple:

Core Formula Working Capital = Current Assets − Current Liabilities Where “current” means assets and liabilities expected to convert to cash or be paid within 12 months.

Specifically, for an HVAC company, the balance sheet items that typically make up working capital include:

Current Assets (what you own that will turn to cash)

Asset	What it is for an HVAC company	Typical range
Accounts Receivable (AR)	Invoices you have sent but not yet collected — commercial service contracts, completed installs, service calls billed to property managers	$40K–$300K+
Inventory	Equipment, refrigerant, parts, and supplies on hand — coils, compressors, thermostats, copper fittings	$20K–$150K
Prepaid Expenses	Insurance premiums paid ahead, software subscriptions (ServiceTitan, etc.), prepaid vehicle insurance	$5K–$40K
Cash	Operating cash in checking — note: cash is usually excluded from NWC and retained by the seller	Excluded*

Current Liabilities (what you owe within 12 months)

Liability	What it is for an HVAC company	Typical range
Accounts Payable (AP)	Bills from suppliers — Johnstone Supply, Ferguson, equipment distributors — not yet paid	$15K–$80K
Accrued Wages & Payroll	Technician pay earned but not yet disbursed, including any bonuses accrued	$8K–$40K
Deferred Revenue	The big one for HVAC — prepaid maintenance contracts where customers paid upfront but you haven’t delivered the service yet	$20K–$200K+
Customer Deposits	Down payments on equipment installs (new systems, mini-splits, boilers) not yet completed	$5K–$60K
Accrued Expenses	Taxes owed, accrued warranty reserves, short-term portions of benefit plans	$5K–$30K

⚠️ Why Deferred Revenue Matters Most

In particular, HVAC companies with strong maintenance agreement programs often carry $50,000 to $200,000 in deferred revenue — prepaid annual contracts for which the company hasn’t yet delivered the service. This creates a liability on your balance sheet. At close, the buyer takes on the obligation to honor every one of those contracts. If your deferred revenue balance is unusually high at closing, it can significantly increase your current liabilities and reduce your working capital — pushing the adjustment against you.

The fix: Understand your deferred revenue balance going into the deal and factor it into your NWC peg negotiation.

The NWC peg: the core of every working capital HVAC deal

Now that you understand what working capital is, here’s the critical concept: in a business acquisition, the buyer isn’t just buying your future earnings. They’re also buying the right to operate the business — which requires a certain amount of fuel in the tank to run smoothly from day one.

That “fuel in the tank” is working capital. And the Net Working Capital (NWC) Peg is the agreed-upon target level of working capital that the seller must leave in the business at close.

The Peg Concept Purchase Price assumes Seller delivers exactly [Target NWC] at close If actual NWC at close is above the peg → Seller gets more. If below → Seller pays the difference.

In other words, think of it like selling a car. If you and the buyer agree on $20,000 and the deal assumes a full tank of gas — but you show up with an empty tank — the buyer doesn’t just pay $20,000. They deduct the cost of the gas. The NWC peg works exactly the same way.

How is the peg number determined?

Generally, the peg is negotiated during the Letter of Intent (LOI) phase, before the final purchase agreement is signed. There are two common approaches:

• Average historical NWC: The most common method. Take the average working capital from the trailing 12 months (or last 2–3 years) of monthly balance sheets. This normalizes for seasonal swings — especially important for HVAC, which is highly seasonal.
• Normalized NWC: Alternatively, a CPA-adjusted figure that removes one-time or non-recurring items and adjusts for any accounting changes, to reflect what “normal” working capital looks like for this specific business.

🗓️ Seasonality Warning for HVAC Sellers

HVAC businesses are some of the most seasonal businesses in the trades. AR spikes in summer (cooling season) and again in fall/winter (heating season). Deferred revenue from maintenance contracts may be highest in January and February when customers renew.

If your deal closes in July — right after peak cooling season — your AR will be at its highest and your peg should reflect that. Conversely, if you agreed to a peg based on a January average and close in July, you may owe the buyer a large true-up. As a result, always use trailing 12-month averages, never a single snapshot date.

A real-world HVAC example

To illustrate, let’s walk through a concrete example of how this plays out. ABC Heating & Cooling is a $3.2M revenue HVAC company in the suburbs of Chicago. The buyer and seller agree on a purchase price of $1,800,000 and a Net Working Capital peg of $210,000 based on the trailing 12-month average.

The balance sheet at close

Line Item	Balance at Close	Notes
Accounts Receivable	$187,400	Strong July — lots of AC installs billed
Inventory	$62,800	Coils, refrigerant, parts on hand
Prepaid Expenses	$14,200	ServiceTitan annual sub + insurance
Total Current Assets	$264,400
Accounts Payable	$38,600	Outstanding supplier invoices
Accrued Payroll	$22,100	9 days of accrued technician wages
Deferred Revenue	$44,500	Unearned maintenance contract obligations
Customer Deposits	$18,200	4 pending new system installs
Total Current Liabilities	$123,400
Net Working Capital at Close	$141,000

The closing adjustment

Closing Adjustment Calculation Adjustment = Actual NWC − Target (Peg)
= $141,000 − $210,000 = −$69,000 Actual NWC came in $69,000 below the peg. Consequently, the seller owes the buyer $69,000 at close. 📋Result for ABC Heating & CoolingSeller receives less than the headline price

Agreed purchase price: $1,800,000

NWC shortfall adjustment: −$69,000

Final wire to seller: $1,731,000

↓ $69,000 BELOW HEADLINE PRICE

The seller in this example walked away with $69,000 less than the number they had been mentally counting on. However, this is not unusual — and it’s entirely avoidable with proper preparation.

The three closing scenarios

Understanding the three possible outcomes at close helps you prepare for each one:

✅Scenario 1Actual NWC = Target Peg (Clean Close)

Actual NWC of $210,000 equals the peg of $210,000. Therefore, no adjustment applies. The seller receives exactly the agreed purchase price.

→ SELLER RECEIVES FULL $1,800,000 🔺Scenario 2Actual NWC > Target Peg (Seller Earns More)

Actual NWC of $255,000 exceeds the peg of $210,000 by $45,000. In this case, the seller delivered more working capital than required — so the buyer pays the surplus.

Final wire: $1,800,000 + $45,000 = $1,845,000

↑ $45,000 ABOVE HEADLINE PRICE 🔻Scenario 3Actual NWC < Target Peg (Seller Pays the Shortfall)

Actual NWC of $141,000 falls below the peg of $210,000 by $69,000. As a result, the seller left less fuel in the tank than agreed — so the shortfall is deducted from proceeds.

Final wire: $1,800,000 − $69,000 = $1,731,000

↓ $69,000 BELOW HEADLINE PRICE

How the true-up works mechanically

In most deals, the working capital adjustment follows two stages: an estimated adjustment at close and a post-close true-up.

Estimated close adjustment

Naturally, because you can’t close the books perfectly on closing day, the parties agree to an estimated NWC figure — usually based on a balance sheet prepared 2–5 days before closing. The closing wire reflects this estimate. If the estimate shows a $69,000 shortfall, $69,000 is held back from the seller’s proceeds (or added to the buyer’s payment, depending on direction).

Post-close true-up (30–90 days)

Subsequently, after close, the buyer prepares a final closing balance sheet — typically within 30 to 90 days — using the same accounting methods agreed upon in the purchase agreement. The buyer treats this as the official NWC number. The parties then settle the difference between the estimated and final figures in cash, dollar-for-dollar.

📌 Key Negotiation Point: Accounting Methods

In any working capital HVAC deal, the purchase agreement must specify that the post-close balance sheet uses the same accounting methods and policies that were used to calculate the peg. If the peg was calculated using cash-basis accounting, the true-up can’t use accrual — or vice versa.

This is where disputes happen. Buyers sometimes apply more conservative accounting policies in the true-up than they used to set the peg. Accordingly, sellers should insist on a defined accounting methodology section in the purchase agreement, reviewed by their CPA before signing.

Five working capital HVAC deal traps to watch for

Here are the five working capital issues that most commonly catch HVAC owners off guard:

1. Collecting AR before close

First, it may seem smart to aggressively collect receivables in the weeks before closing — boosting your cash balance and reducing AR. But remember: cash is typically excluded from NWC and retained by the seller anyway. Aggressively collecting AR before close doesn’t help your NWC number — you’re just converting one current asset (AR) into another (cash). Instead, focus on keeping AR current and well-documented.

2. Stocking up on inventory

Similarly, some sellers load up on inventory in the months before a sale, thinking more parts on the shelf means more value. But excess inventory inflates your current assets and can push your actual NWC above the peg — which is fine — unless the buyer argues that certain inventory is obsolete, slow-moving, or not at fair value. Therefore, make sure your inventory is properly valued and auditable.

3. Deferred revenue from maintenance agreements

Additionally, if you’ve been aggressively selling annual maintenance agreements — which is great for your business and your valuation multiple — you’ll have meaningful deferred revenue. A large deferred revenue balance increases your current liabilities, which reduces NWC. Plan for this by ensuring it’s accurately reflected in the peg calculation.

4. Disputed or uncollectable AR

Furthermore, buyers will scrutinize your accounts receivable aging schedule. Any invoices over 90 days past due may be excluded from the NWC calculation or written down in value. If you have stale receivables, try to resolve or write them off before you enter due diligence — otherwise they’ll be adjusted out of your NWC at close.

5. Timing of large purchases

Finally, if you order a $50,000 batch of equipment right before close — intending to use it on post-close jobs — that inventory enters your current assets and helps your NWC. But if the payment for that equipment shows up as accounts payable, it increases your liabilities by the same amount. The net effect is zero. In short, timing large transactions doesn’t game the NWC — it just adds noise. Keep your balance sheet clean and consistent in the 60 days before close.

How to protect yourself in a working capital HVAC deal

A working capital HVAC deal negotiation doesn’t have to work against you. Here’s how to come to the table prepared:

• Get your CPA involved early. Ideally 6–12 months before you go to market. They should prepare monthly balance sheets, review NWC trends, and help you understand what a normalized peg will look like.
• Request trailing 12-month averages, not a single date snapshot. This protects against seasonal distortion — especially important for HVAC where NWC swings significantly quarter to quarter.
• Define every line item in the peg calculation. Before signing the LOI, get in writing exactly which assets and liabilities are included in NWC, and how each is valued. Ambiguity always resolves in the buyer’s favor after the fact.
• Negotiate a reasonable collar. A collar (or “deadband”) means small NWC deviations — say, plus or minus $25,000 — don’t trigger an adjustment at all. Essentially, this protects both parties from minor accounting differences causing small cash settlements.
• Understand your deferred revenue balance. Know it, disclose it, and make sure it’s part of the peg discussion — not a surprise in the true-up.
• Keep your books consistent right up to close. Don’t change how you classify expenses, recognize revenue, or value inventory in the months leading up to the sale. After all, any inconsistency gives the buyer grounds to challenge your NWC calculation.

What this means if you’re considering selling

The working capital HVAC deal peg is a fair mechanism — it ensures the buyer gets a properly fueled business on day one, and it ensures you’re not leaving behind value you created. The problem isn’t the mechanism. The problem is sellers who encounter it for the first time at the closing table, with no time to prepare, negotiate, or push back.

Ultimately, the best protection is simple: start the conversation early. At Homestead, we walk through working capital expectations in our first real financial conversation — not buried in a closing statement. We use a CPA to help identify the right normalized peg, and we show sellers exactly what the adjustment calculation will look like before they sign anything.

You’ve spent decades building this business. The working capital peg shouldn’t be the thing that surprises you at the finish line.

---

Questions about how a working capital HVAC deal would apply to your specific business? Reach out directly — Michael responds to every message personally and is happy to walk through the numbers with you, no obligation.