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Commercial due diligence for a small acquisition, worked on residential HVAC
Commercial due diligence (CDD) tests the market a target sells into: its size, its direction, who competes, how exposed the revenue is, and what could break your plan. It does not audit the books or read the contracts. On a $1 million to $10 million deal most of it can be done from public data, and it should be, before you pay anyone. Below is the industry section for a residential heating and air-conditioning company with about $4 million in revenue, every number linked to the table or filing it came from. Treat it as input to your own diligence, not an independent study and not investment advice.
What commercial due diligence covers
- Market size and growth: how much is spent on what the target sells, locally and nationally, and which way it is moving.
- Demand: why customers buy, and whether they keep buying in a downturn.
- Competition: how fragmented the market is, who is consolidating it, and on what terms.
- Customers and pricing: concentration, contract terms, and the price increases the market has absorbed.
- Risks: regulation, labour, input costs, weather, technology.
Three other workstreams sit beside it. Financial diligence, usually a quality of earnings (QoE) report from an accounting firm, tests whether the earnings are real. Legal diligence covers contracts, licences, litigation and employment. Valuation sets the price.
What commercial due diligence costs
Most CDD providers quote per engagement and publish nothing. These are the figures we found on vendors’ own pages, read on 2026-09-27.
| Source | What it is | Published figure |
|---|---|---|
| MMCG Invest | SBA feasibility study | “$4,900 to $8,500” for a single-site 7(a) business acquisition, 14 to 21 business days |
| User Intuition | AI-moderated customer interviews | “$3,000” for a 100-interview study |
| Papermark, a data-room vendor | An estimate, not its own service | “Small deals under $10M typically cost $25,000 to $50,000” for all diligence |
| IBISWorld | Industry reports | No price on its pricing page |
The Papermark figure covers financial, legal and commercial work together, and the post gives no source for it. It is a rough guide to the total you will be quoted, not the price of CDD alone.
The industry section for a $4 million residential HVAC company
This is the section a searcher, independent sponsor or SBA borrower would write for a company that installs, replaces and services heating and cooling in homes. It uses national data. A real deal needs the same work for the target’s metro.
The government code is wider than the business
Residential HVAC contractors sit in NAICS 238220, plumbing, heating and air-conditioning contractors. The code also holds plumbers, sprinkler fitters and commercial mechanical contractors. The 2022 Economic Census splits its $297.6 billion in revenue by each establishment’s main line of work (EC2223KOB):
| Main kind of business, NAICS 238220, 2022 | Revenue | Share |
|---|---|---|
| HVAC contractor | $121.7B | 40.9% |
| Plumbing contractor | $75.1B | 25.2% |
| Mechanical contractor | $54.4B | 18.3% |
| Everything else (sprinkler, refrigeration, other) | $46.4B | 15.6% |
The Census publishes no figure for residential HVAC alone, so any report that quotes one has estimated it or bought it. Watsco’s 10-K cites a paid IBISWorld figure of about $156 billion for residential HVAC products “on an installed basis” (Watsco 10-K 2025). Public data cannot check it.
Size and trend
| NAICS 238220, US | Employer establishments | Employees | Annual payroll | Source |
|---|---|---|---|---|
| 2007 | 100,806 | 1,012,541 | $47.2B | CBP 2007 |
| 2012 | 93,000 | 821,579 | $43.0B | CBP 2012 |
| 2017 | 102,455 | 1,015,585 | $60.1B | CBP 2017 |
| 2023 | 111,207 | 1,214,761 | $89.5B | CBP 2023 |
The industry lost nearly a fifth of its jobs in the housing bust and has since passed its old peak. From 2017 to 2023, establishments rose 8.5% and employees 19.6%. The monthly jobs survey agrees: 1,085,500 employees in August 2017, 1,334,600 in August 2025 (BLS CES, CEU2023822001). Another 178,663 businesses with no employees earned $14.0 billion in 2023 (Nonemployer Statistics 2023). Those are owner-operators, not targets.
A $4 million company falls in the Economic Census class of $2.5 million to $4.99 million in revenue. In 2022 that class had 8,874 firms that ran all year, averaging $3.49 million in revenue and about 16 employees, with about $221,000 of revenue per employee and payroll at 28.3% of revenue (ECNSIZE2022). Across the whole code, materials were 31.5% of revenue and payroll 27.0% (EC2223BASIC). These averages mix plumbing and HVAC and say nothing about margin. If your target’s headcount or payroll share is far off them, ask why.
Residential work and the service mix
The product-line tables show where the code’s revenue comes from (ECNNAPCSIND2022). Work on residential buildings, from single-family and manufactured homes to apartment blocks, came to $108.2 billion in 2022, 36% of the code:
| Residential work, NAICS 238220, 2022 | Revenue | Share of residential |
|---|---|---|
| New construction | $46.8B | 43% |
| Additions, renovations and alterations | $22.4B | 21% |
| Maintenance and repair | $39.0B | 36% |
Maintenance and repair of single-family houses alone was $34.6 billion, and a third of all establishments in the code reported repair work on detached houses. These lines include plumbing, and the Census has no separate line for replacing a heating or cooling system. The point for a buyer is the split: 57% of residential revenue in this code comes from existing homes. The business runs on the installed base more than on housing starts.
Fragmented, with a consolidating top end
The four largest firms in NAICS 238220 earned 4.7% of its 2022 revenue, the fifty largest 14.4% (ECNSIZE2022). Only 982 firms ran more than one establishment, and they took $80.5 billion, 27% of revenue. Watsco, the largest HVAC distributor in North America, sells to “more than 130,000 active contractors” (Watsco 10-K 2025).
The residential consolidators are private, but public filings still show them.
- The listed roll-up is commercial. Comfort Systems USA, the listed mechanical contractor built by acquisition, got 1.4% of its 2025 revenue from multi-family and residential work (Comfort Systems USA 10-K 2025). It is not buying $4 million residential shops.
- Private credit funds the residential platforms. Business development companies list every loan they hold. Wrench Group, a self-described “National Home Services Platform” with 24 brands in HVAC, plumbing, electrical and water (wrenchgroup.com), is a first-lien borrower of Blue Owl Capital Corp II (10-Q, March 2026). Apex Service Partners, an HVAC, plumbing and electrical group (apexservicepartners.com), holds first-lien term loans at SOFR plus 5.00% from PIMCO Capital Solutions BDC (10-Q, June 2026). Heartland Home Services, a group of heating, cooling, plumbing and electrical companies (heartlandhomeservices.com), has a first-lien loan at SOFR plus 6.00% from Goldman Sachs BDC (10-Q, March 2026).
That is why private equity buys HVAC companies. The market is fragmented, the revenue is tied to equipment that has to be serviced and replaced, and lenders will fund platforms that buy smaller firms. It also means your bid on a good $4 million company may be up against a platform with that credit behind it.
Labour sets the ceiling
Heating, air-conditioning and refrigeration mechanics held 409,670 wage jobs in May 2025, at a median of $61,010 a year, $29.33 an hour (BLS OEWS, 49-9021). Counting the self-employed there were 440,900 jobs. BLS projects 11% growth from 2025 to 2035 and about 40,600 openings a year, many of them replacing people who retire or leave the trade. 68% of these mechanics work for NAICS 238220 contractors (BLS OOH).
Wages have outrun prices. Average hourly earnings in the industry went from $29.24 in December 2017 to $41.32 in December 2025, up 41.3% (BLS CES, CEU2023822003). Consumer prices rose 31.4% (CPI-U). A company that can only grow as fast as it fills vans with technicians carries that gap as its main operating risk.
The refrigerant transition
The American Innovation and Manufacturing (AIM) Act caps US production and consumption of hydrofluorocarbons (HFCs) at 60% of baseline for 2024 to 2028, 30% from 2029, 20% from 2034 and 15% from 2036 (42 U.S.C. 7675). Less supply of the refrigerant in older systems makes them dearer to repair.
EPA’s 2023 technology transitions rule set a global warming potential limit of 700 for new residential and light commercial air-conditioning and heat pump systems. That rules out R-410A, the refrigerant in most installed central air. New field-assembled systems could not use it from January 1, 2025, with a year’s grace for equipment built or imported before then (88 FR 73098). The industry moved to R-454B and R-32.
A final rule in May 2026 removed the installation deadline altogether for R-410A equipment made or imported before 2025. EPA cited stranded distributor inventory and contractors who could not get R-454B in the field in 2025. The rule kept the existing policy on repairs: replacing a failed outdoor condensing unit on an existing system is allowed, but replacing the indoor coil as well counts as a new system (91 FR 31284, effective July 27, 2026).
New systems cost more, so each replacement ticket is bigger. The changeover also disrupted 2025, as the filings show.
What manufacturers and distributors reported for 2025
| Company, 2025 10-K | Residential result |
|---|---|
| Lennox, Home Comfort Solutions | Net sales down 7%: volume down 17%, price and mix up 10% |
| Carrier, Climate Solutions Americas | Residential volume down 9%, “reduced end-market demand and distributor destocking” |
| Watsco | Ducted residential systems down 10%: units down 18%, average selling price up 8%, citing the refrigerant transition, mild summer weather, less home building and “reduced consumer spending for replacement systems” |
2025 was fewer units at higher prices. A target that grew revenue in 2025 may have grown on price, not jobs. One that shrank may just have tracked the market. Ask for job counts, not only revenue.
The filings also size the demand base. Watsco puts the life of central air conditioners and furnaces at about 8 to 20 years depending on region, and cites Energy Information Administration data for about 102 million systems in service for more than 10 years (Watsco 10-K 2025). Lennox says “a substantial portion” of sales in each segment is replacement business, and that the industry ships roughly twice as many units in June as in December (Lennox 10-K 2025).
Risks to test in the target
The industry data is the benchmark. The target’s records are the answer.
- Customer concentration. Homeowners are many and small, so concentration hides in channels: a builder’s new-construction contract, a property manager, a home-warranty company. Frontdoor alone handles about 3.8 million service requests a year through about 17,000 independent contractor firms (Frontdoor 10-K 2025). Ask for revenue by channel and by top 10 payers for three years, and the terms of any warranty or builder agreement.
- Technicians. Ask for a roster with hire dates, licences and pay, turnover by year, and who holds the customer relationships. Compare pay with the local OEWS wage for 49-9021, not the national median.
- The replacement cycle. Split revenue into service calls, maintenance agreements, replacements and new construction. Agreement counts and renewal rates show how much revenue recurs. Check whether the refrigerant change pulled replacement sales into 2024 or 2025.
- Weather. Get monthly revenue for three years and set it against local cooling and heating degree days from NOAA’s Climate Prediction Center. One hot summer can flatter a year.
- Competition for the deal. Map which platforms have bought in the metro, from press releases and state licence transfers. A platform bidder changes your price and your timeline, and it is also your likely exit.
What this does not cover
It does not see the target’s financials, so it cannot test earnings; that is a QoE job. It does not review contracts, licences or litigation; that is legal diligence. It does not value the company or tell you whether to buy it. It uses national data, and residential HVAC is local: a Phoenix shop and a Minneapolis shop share a code and little else. Some SBA lenders ask for a feasibility study from an independent third party. This page is not that, and neither is a Hyperresearch report.
Where a $49 Deep run fits
Everything above is public, but pulling it and checking every number takes days. A Hyperresearch Deep run ($49) takes the same questions to one target’s market: the metro’s contractor counts and wages, its housing stock, its weather record, the platforms buying nearby, and the filings of the public companies that sell into it. It targets about 150 to 200 sources over about 3 to 5 hours (targets, not guarantees), writes 3 to 5 chapters, and checks each citation against the source it cites. It reads SEC EDGAR filings. It does not read PitchBook or other private-company databases, a seller’s data room, or broker listings.
Use it to check the market case before you pay for outside diligence, to draft the industry section your lender asks for, or to hand a CDD firm a narrower brief.
See pricing for what a run costs and the verification receipt for how citations are checked. For building a local market-size estimate, see how to calculate market size; for why paid industry figures disagree, see why market size reports disagree.
By Jordan Gibbs · Updated 2026-09-27