What Is Your Houston Business Actually Worth? Three Ways to Find Out

I sat down with an HVAC company owner in the Energy Corridor last year. He’d just turned 58. Twenty-two years running the company.

Two service trucks. A small warehouse off I-10. Six employees. A customer base built entirely on referrals between Katy and Memorial. Revenue was $1.2 million. He took home around $180,000 after all expenses.

He wants to sell in three to five years. First question: “What’s it worth?”

We ran three different valuation methods. They produced three different numbers. That’s normal.

The differences matter because each method answers a slightly different question about value. Understanding which number is relevant (and which one a buyer will actually pay) is the difference between a realistic exit plan and a fantasy.

Method 1: The Income Approach (What the Business Earns)

The income approach values a business based on what it generates for its owner. For small businesses, the most common version is Seller’s Discretionary Earnings (SDE).

SDE: The Number That Matters Most for Small Business Sales

SDE starts with net income on the tax return. Then we add back everything specific to the current owner.

Line Item	Amount
Net income (per tax return)	$92,000
Owner salary	$85,000
Owner health insurance	$14,400
Owner vehicle (personal use portion)	$8,600
One-time legal expense (non-recurring)	$6,200
Depreciation	$22,000
Interest on business loans	$11,800
Total SDE	$240,000

The difference between net income ($92,000) and SDE ($240,000) is dramatic. A buyer looking at the tax return sees a business earning $92,000. A buyer looking at SDE sees a business generating $240,000 in total economic benefit.

SDE is the standard for businesses under $1 to $2 million in SDE. Above that threshold, buyers and brokers shift to EBITDA. EBITDA doesn’t add back the owner’s salary because at that size, the buyer is hiring a manager, not stepping into the owner role.

The Multiple

The HVAC company’s value under the income approach depends on the multiple applied to SDE. I see multiples for Houston service businesses ranging from 2.0x to 4.0x SDE. Several factors drive where a specific business lands.

Recurring revenue. A business with maintenance contracts that auto-renew commands a higher multiple than one dependent on one-time project work. This HVAC company has 340 annual maintenance contracts generating $170,000 in recurring revenue. Strong signal.

Owner dependency. If the owner leaves and the phone stops ringing, the business isn’t worth much to a buyer. This owner still runs every estimate personally. That’s a risk factor that depresses the multiple.

Customer concentration. If 30% of revenue comes from one customer, the buyer is one phone call away from losing a third of the business. This company’s largest customer represents 8% of revenue. Healthy.

Growth trajectory. Flat revenue over three years suggests a mature business. Growing revenue suggests upside for the buyer. This HVAC company has grown 6% to 8% annually for the last four years.

Clean financials. Three years of reconciled monthly statements tell a buyer the numbers are real. A shoebox of receipts tells a buyer to discount everything by 20%.

For this HVAC company, a reasonable SDE multiple is 2.5x to 3.0x.

Valuation range (income approach): $600,000 to $720,000.

Discounted Cash Flow: The Corporate Version

Larger businesses and institutional buyers use Discounted Cash Flow (DCF) analysis. DCF projects future earnings and discounts them back to present value. It’s the standard in private equity and M&A transactions.

For a $1.2 million revenue HVAC company selling to a local buyer, DCF is rarely the primary method. The math gets complicated (discount rates, terminal values, growth assumptions). The inputs are uncertain enough that the output feels more like financial astrology than valuation.

DCF becomes relevant when the buyer is sophisticated. Think a private equity firm rolling up HVAC companies in the Houston metro. Or when the business has significant contracted future revenue that makes projections defensible.

Method 2: The Market Approach (What Similar Businesses Sold For)

The market approach asks: what did comparable businesses actually sell for?

Comparable Transactions

Business brokers in the Houston area maintain databases of completed sales. BizBuySell, the International Business Brokers Association (IBBA), and DealStats (formerly Pratt’s Stats) all track transaction data.

For HVAC and mechanical services businesses in the Gulf Coast region, I see recent transaction data like this:

Revenue Range	Typical SDE Multiple	Typical Revenue Multiple
$500K to $1M	1.8x to 2.5x SDE	0.30x to 0.50x revenue
$1M to $2M	2.2x to 3.2x SDE	0.40x to 0.65x revenue
$2M to $5M	2.8x to 4.0x SDE	0.50x to 0.80x revenue

The HVAC company at $1.2M revenue and $240,000 SDE falls in the middle tier.

Using the market approach:

SDE multiple method: $240,000 x 2.5x = $600,000 (low) to $240,000 x 3.0x = $720,000 (high)

Revenue multiple method: $1,200,000 x 0.45x = $540,000 (low) to $1,200,000 x 0.60x = $720,000 (high)

Valuation range (market approach): $540,000 to $720,000.

The convergence between the income approach and market approach isn’t a coincidence. Both are driven by the same underlying reality. How much profit the business generates relative to what buyers are willing to pay for that profit stream.

Where the Market Data Comes From

Most completed business sales in Texas are not public record. Unlike real estate transactions (which are recorded with the county), business sales are private agreements between buyer and seller. The transaction data that exists in broker databases is voluntarily reported. It represents a fraction of total sales.

This means market comparables for Houston service businesses are directional, not precise. A broker who has personally closed 15 HVAC deals in the greater Houston area has better data than any database. That local knowledge (who bought, why they paid what they paid, what terms looked like) is where the real comparables live.

Method 3: The Asset Approach (What the Business Owns)

The asset approach adds up everything the business owns. Then subtracts everything it owes.

For the HVAC company:

Asset	Fair Market Value
Two service trucks (2021, 2023)	$62,000
Tools and equipment	$35,000
Inventory (refrigerant, parts, supplies)	$18,000
Accounts receivable	$45,000
Customer list / goodwill	???
Total tangible assets	$160,000

Liability	Amount
Truck loan balance	$28,000
Equipment financing	$12,000
Accounts payable	$15,000
Total liabilities	$55,000

Net asset value: $105,000.

Notice the problem. The asset approach values this $1.2 million revenue business at $105,000. That’s less than half of one year’s SDE.

The asset approach systematically undervalues profitable service businesses. The most valuable asset (the customer relationships, the reputation, the recurring revenue stream, the trained workforce) doesn’t appear on the balance sheet. Accountants call this “goodwill.” Buyers pay for it. The asset method doesn’t capture it.

The asset approach is the right tool for businesses that are asset-heavy and earnings-light. A commercial real estate holding company. A manufacturing shop with expensive CNC machines. A struggling business being sold for its equipment.

For a profitable Houston service company, it establishes a floor value (the minimum the business is worth). Not the real value.

Valuation (asset approach): $105,000 (floor only).

Which Number Is Right?

All three. And none of them.

The real value of a business is what a willing buyer pays a willing seller. Both parties have adequate information. Neither is under duress. The valuation methods provide a framework for that negotiation, not a final answer.

For the HVAC company, the practical range is $550,000 to $720,000. The exact number will depend on:

Deal structure. An all-cash offer at closing is worth less than a deal with an earnout. (An earnout means the seller gets additional payments based on post-sale performance.) Sellers who accept earnouts can often negotiate a higher total price because the buyer’s risk is lower.

Transition period. The owner who stays for 12 months to introduce the buyer to key customers makes the business worth more than one who hands over the keys on day one. For this HVAC company, where the owner runs every estimate, a long transition is essentially required.

Financing. SBA loans cover up to 90% of business acquisitions. But the buyer still needs 10% to 20% down. The DSCR requirements have to be met. A deal that’s easy to finance attracts more buyers and higher offers.

Non-compete agreement. A seller who won’t sign a non-compete in the Katy-to-Memorial service area is effectively saying “I might start a competing business and take my customers back.” Buyers discount heavily for this risk.

Texas-Specific Considerations

Franchise tax on the sale. If the HVAC company is structured as an LLC or corporation (which it should be, see our incorporation guide), the Texas franchise tax applies in the final year of operations. The business must file a final franchise tax return with the Texas Comptroller. The tax itself is modest for businesses under $2.47 million in revenue. But the filing can’t be skipped.

Asset sale vs. stock sale. Most Houston small business acquisitions are structured as asset sales. The buyer purchases the company’s assets (equipment, customer contracts, trade name) rather than the legal entity itself. Asset sales are simpler. They let the buyer avoid inheriting unknown liabilities.

The tax treatment differs for buyer and seller. Sellers prefer stock sales (capital gains treatment on the full amount). Buyers prefer asset sales (step-up in basis for depreciation). This negotiation point alone can shift the after-tax proceeds by $30,000 to $60,000 on a deal this size.

Bulk sales notice. Texas doesn’t have a formal bulk sales law. Article 6 of the UCC was repealed in Texas. But the buyer’s lender will still require due diligence on outstanding liens and obligations. Clean books and a clear lien search simplify this process.

The Three-Year Plan

The HVAC company owner has three to five years before he wants to sell. That’s enough time to significantly increase the valuation by addressing the factors that depress multiples.

Reduce owner dependency. Hire and train an estimator. If the business can produce revenue without the owner running every sales call, the multiple increases by 0.3x to 0.5x SDE. On $240,000 SDE, that’s $72,000 to $120,000 in additional value.

Grow the maintenance contract base. Recurring revenue commands higher multiples. Moving from $170,000 to $250,000 in contract revenue changes the buyer’s perception of risk.

Produce three years of clean monthly financials. A buyer who can see month-by-month performance for 36 consecutive months has confidence in the numbers. That confidence translates directly into willingness to pay.

Formalize operations. Written procedures. Documented customer histories. Organized vendor relationships. A business that runs without everything living in the owner’s head is worth more than one that doesn’t.

The difference between selling a business that “makes good money” and selling a business with documented, verifiable, transferable earnings is tens of thousands of dollars. Often six figures.

The bookkeeping isn’t a cost center in this context. It’s exit preparation.

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