Private Equity Acquisition Reflection: Ohio Superstars

HVAC Deal
Page 1: Deal Details and Rationale

Transaction Overview

The successful acquisition of Ohio Superstars HVAC by Jonesville Capital Partners represents a classic buy-and-build
transaction in the fragmented HVAC services sector [1] [2] . The deal structure reflects careful consideration of both
valuation metrics and cultural preservation, key elements that ultimately secured this competitive transaction.

Key Deal Metrics:

Enterprise Value: $40.0 million

EBITDA Multiple: 8.7x (applied to adjusted EBITDA)
Capital Structure: 60% equity ($24 million) / 40% debt ($16 million)

Earnout Component: $6.0 million (25% of equity value)

EBITDA Adjustments and Valuation Foundation

The deal's valuation foundation rested on a sophisticated EBITDA adjustment process that transformed the reported $4.0
million EBITDA into an adjusted figure of $4.6 million [1] . These adjustments included:

Family cost savings: +$800,000 (removing excess family compensation)

Leadership transition costs: -$100,000 (VP Operations promotion to CEO)

Advisory fee provision: -$100,000 (retaining founder in paid advisory role)

Professional CFO replacement: Neutral impact (replacing sister with qualified CFO)

This 15% upward adjustment to EBITDA directly translated to $5.2 million in additional enterprise value ($600,000 × 8.7x
multiple), demonstrating the material impact of well-supported normalization adjustments [3] [4] .

Strategic Rationale

Ohio Superstars HVAC presented compelling investment characteristics that aligned with Jonesville Capital Partners'
lower middle-market strategy [2] :

Revenue Stability and Brand Equity: The company's established brand recognition, evidenced by 10,000 households
with aging HVAC equipment averaging $10,000 replacement value, provided a $100 million embedded revenue
opportunity [1] . The "Call 1-800-SUPERSTARS!" branding strategy created sustainable competitive advantages through
customer retention and low acquisition costs.

Operational Excellence: Operating at 22% EBITDA margins versus 20% industry average demonstrated management
competency even before optimization [1] . The company's performance exceeded market benchmarks while maintaining
family overhead costs, suggesting significant upside potential under professional management.

Industry Tailwinds: Positive secular trends in HVAC replacement cycles, combined with the company's established
customer base nearing equipment end-of-life, created a compelling growth trajectory [2] . The residential HVAC market's
defensive characteristics and recurring revenue nature aligned with private equity return requirements.

Management Continuity: The founder's son (VP Operations) demonstrated both technical competency and willingness
to assume CEO responsibilities, ensuring operational continuity while facilitating ownership transition [1] . This internal
succession plan reduced key-person risk while maintaining institutional knowledge.
Page 2: The Devil is in the "Adjusted EBITDA"

EBITDA Adjustments as Deal Determinants

The Ohio Superstars HVAC transaction exemplifies how EBITDA adjustments function as more than accounting
exercises—they fundamentally shape both present valuation and future operational reality [3] [5] . The negotiation over
adjusted EBITDA became a proxy for broader discussions about business normalization, operational improvements, and
value creation potential.

Valuation Impact and Multiplier Effect

Every dollar of EBITDA adjustment carried an 8.7x multiplier impact on enterprise value, making the $600,000 net
adjustment worth $5.2 million in purchase price [4] [6] . This multiplier effect explains why EBITDA adjustments receive
intense scrutiny during due diligence processes. Private equity firms understand that adjustment disagreements can
make or break deal economics, particularly in competitive auction processes [7] [8] .

The adjustments in this transaction fell into multiple categories reflecting different risk profiles:

Family Cost Normalization ($800,000): This represented the most defensible adjustment, removing excess family
compensation that wouldn't continue under new ownership [9] [10] . The significant magnitude—20% of base EBITDA—
reflected typical private company inefficiencies that create immediate value creation opportunities for professional
investors.

Leadership Transition Costs (-$200,000): The decision to promote the VP Operations to CEO while retaining the
founder as paid advisor represented strategic investment in continuity [1] . These costs, while reducing adjusted EBITDA,
demonstrated alignment with long-term value preservation over short-term valuation optimization.

Due Diligence as Value Discovery

The extensive due diligence process around EBITDA adjustments served multiple functions beyond validation [7] [11] .
Commercial due diligence teams spend significant time on adjustment analysis because these figures determine both
present valuation and future operational roadmaps. Each proposed adjustment requires supporting documentation,
management interviews, and benchmark comparisons to industry norms [8] [12] .

In family-owned businesses like Ohio Superstars, adjustment discussions often reveal deeper operational insights. The
$800,000 family cost adjustment, for example, highlighted organizational inefficiencies while simultaneously validating
management depth through the son's capability to assume leadership [1] . This dual revelation—cost savings opportunity
and management succession plan—strengthened the investment thesis beyond pure financial metrics.

Buyer-Seller Alignment Through Adjustment Process

The negotiation over EBITDA adjustments created alignment between buyer and seller expectations for post-acquisition
performance [8] [12] . By agreeing to specific normalization adjustments, both parties established baseline performance
expectations that informed earnout structuring and operational planning.

The seller's acceptance of leadership transition costs demonstrated realistic expectations about professional
management requirements [10] . Conversely, the buyer's recognition of family cost savings validated the business's
underlying profitability potential. This mutual acknowledgment of adjustment validity created foundation for successful
post-acquisition integration.
Strategic Implications for Future Operations
EBITDA adjustments don't merely determine purchase price—they establish the operational blueprint for value creation [5]
[11] . The agreed-upon adjustments in this transaction created specific improvement initiatives:

Cost Structure Optimization: The $800,000 family cost adjustment became a concrete value creation target, with clear
implementation path through professional management structure [9] .

Leadership Development Investment: The decision to absorb CEO transition costs while retaining founder advisory
fees represented strategic investment in cultural continuity and knowledge transfer [1] .

Professional Infrastructure Building: Replacing family members with qualified professionals (CFO role) established
scalable organizational structure supporting future growth and add-on acquisitions [2] .

These operational commitments, embedded within EBITDA adjustment agreements, demonstrate how adjustment
negotiations function as strategic planning exercises disguised as valuation discussions.

Page 3: Cultural Preservation and Earnout Alignment

Preserving Organizational and Family Alignment

The Ohio Superstars HVAC acquisition succeeded where many family business transactions fail: maintaining cultural
continuity while implementing professional management practices [13] [14] . The deal structure deliberately preserved
family involvement and business identity, recognizing that cultural disruption represents one of the highest risks in
founder-led business acquisitions [15] [16] .

Strategic Cultural Integration

Family-owned businesses possess unique cultural characteristics that drive operational performance and customer
loyalty [17] [18] . Ohio Superstars' success stemmed from personal relationships, brand recognition, and service quality
standards established over multiple generations [1] . The acquiring private equity firm recognized that displacing this
culture entirely would destroy value creation potential.

The retention strategy included multiple cultural preservation mechanisms:

Founder Advisory Role: Maintaining the founder as paid advisor preserved customer relationships and institutional
knowledge while facilitating gradual transition [1] [15] . This approach contrasts sharply with typical private equity
transactions that prioritize immediate cost reduction over cultural continuity [19] [20] .

Internal Management Succession: Promoting the founder's son to CEO role demonstrated respect for family leadership
while ensuring operational competency [1] . This decision required higher compensation costs but preserved cultural
authenticity and employee confidence during ownership transition [16] [21] .

Brand Identity Preservation: Maintaining the "Ohio Superstars" brand and existing service delivery models protected
customer relationships and market positioning [15] . Many private equity acquisitions fail when aggressive rebranding or
standardization efforts alienate existing customer bases [13] [19] .

Earnout Structures as Mutual Collaboration Tools

The $6.0 million earnout component—representing 25% of total equity value—functioned as more than gap-bridging
mechanism [1] . This structure created shared incentives for value creation while addressing information asymmetries
between buyer and seller [22] [23] .

Performance Alignment Through Earnout Design

The earnout's three-year measurement period with annual pro-rata payouts created sustained engagement from the
founding family [1] . Unlike traditional earnouts that create adversarial relationships, this structure encouraged
collaborative value creation:
Milestone Structure:

Below $15 million cumulative EBITDA: 0% payout

$15 million cumulative EBITDA: 50% payout ($3.0 million)
$25 million cumulative EBITDA: 100% payout ($6.0 million)

These thresholds required significant performance improvement (67% EBITDA growth over three years) while remaining
achievable through operational enhancements and market expansion [1] [23] .

Risk Sharing and Incentive Alignment

Earnouts address fundamental information asymmetries in private company acquisitions [24] [25] . The founding family
possessed superior knowledge about customer relationships, market opportunities, and operational capabilities. The
earnout structure incentivized knowledge transfer and continued engagement rather than traditional post-closing
disengagement [23] [26] .

The structure also protected buyer downside risk while preserving seller upside participation [24] . If operational
improvements failed to materialize, earnout payments would be minimal. Conversely, successful value creation would
reward the founding family for their continued contribution and expertise.

Shared Interest Creation and Value Maximization

The earnout's EBITDA-based measurement created alignment around operational improvements rather than short-term
financial engineering [1] [22] . Both buyer and seller benefited from:

Revenue Growth Initiatives: Expanding service territory and capturing aging equipment replacement opportunities
Cost Structure Optimization: Implementing professional management practices while preserving service quality
Strategic Add-on Acquisitions: Leveraging platform strength for regional expansion and service line diversification

Long-term Value Creation Philosophy

This transaction demonstrated sophisticated understanding of value creation in family-owned businesses [17] [18] . Rather
than pursuing aggressive cost reduction or immediate operational changes, the buyer invested in cultural preservation
and gradual professionalization. The earnout structure ensured that founding family expertise remained engaged
throughout the critical integration period.

The deal's success metrics extended beyond financial returns to include employee retention, customer satisfaction, and
cultural continuity [13] [14] . This holistic approach to value creation—balancing financial optimization with cultural
preservation—represents evolving best practices in private equity acquisitions of founder-led businesses [15] [27] .

The Ohio Superstars HVAC acquisition illustrates how thoughtful deal structuring can preserve entrepreneurial culture
while implementing institutional capabilities necessary for scaled growth. The earnout mechanism transformed potential
conflicts between buyer efficiency and seller tradition into collaborative value creation opportunities, demonstrating that
cultural sensitivity and financial performance can be mutually reinforcing rather than competitive objectives.
[28] [29] [30] [31] [32] [33] [34] [35] [36] [37] [38] [39] [40] [41]

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