Photo by Just Let Me Do It Commercial Services Inc.

Quality of earnings is the lens through which reported EBITDA is separated from durable, cash generating performance in lower middle market residential and commercial services. In fragmented, founder-led businesses, reported financials often reflect years of practical decisions rather than institutional discipline. A well structured quality of earnings review transforms that history into a defensible view of sustainable earnings that can support valuation, leverage and long term partnership.

At its core, a QoE process reframes the conversation from “what did the company report” to “what will the business reliably produce going forward.” A Miller Cooper report explains that QoE analyses look beyond the quantitative information presented in financial statements and dissect revenue and expenses on a monthly basis to assess sustainability and identify risks that could impair the business as a going concern. The work typically begins with trailing twelve month EBITDA, then adjusts for nonrecurring items, above or below market owner compensation, discretionary expenses and differences in accounting policies relative to industry norms. Ratio analysis, margin trends and working capital behavior are layered in to assess earnings durability.

This is fundamentally different from an audit. As BPM notes in its discussion of quality of earnings versus audit, audits opine on GAAP compliance and net income accuracy, while QoE is transaction driven and focused squarely on adjusted EBITDA, working capital sufficiency and deal specific risk. One answers “are the financials prepared correctly.” The other answers “what is the business actually worth.”

In lower middle market services, that distinction matters. In a $3 million EBITDA HVAC, landscaping or plumbing business, adjustments are not academic. Each owner vehicle, related party lease, one time legal expense or personal travel cost can materially change the baseline investors capitalize. A 1.0x swing in adjusted EBITDA on a 7x multiple translates into millions of dollars of enterprise value. Ascension Advisory’s  discussion of the “EBITDA trap” highlights how middle market deals built on overly aggressive or poorly supported adjustments frequently result in retrades. A transparent bridge from reported EBITDA to adjusted EBITDA is not just best practice. It is risk control.

Sector dynamics make disciplined QoE even more important. DC Advisory reports that residential services M&A activity increased 134% between 2018 and 2022, with private equity activity up 368% during the same period. The sector remains highly fragmented, characterized by small and medium sized independent operators. In this environment, recurring revenue models such as annual HVAC service agreements or quarterly pest control contracts have become one of the most important developments of the last decade because they provide predictable revenue streams that can be underwritten with greater confidence. A QoE process must validate not only the revenue amount but also the true retention, churn behavior and margin contribution of those recurring contracts.

On the commercial side, scale and structure add another layer of scrutiny. Mordor Intelligence estimates that the US facility management market will reach ~$376.51 billion in 2026 and grow to $434.16 billion by 2031, reflecting a compound annual growth rate ~2.9%. Hard services such as mechanical, electrical and plumbing account for ~58% of total spending. These services are non discretionary, yet margin volatility can still arise from contract structure, labor mix and escalation provisions. A QoE must examine backlog quality, contract duration, renewal assumptions and embedded pricing escalators, not just trailing results.

Macro productivity gaps further explain why QoE matters in owner operated services. McKinsey’s research on US small businesses finds that small companies are only about 47% as productive as large firms across advanced economies. Closing that gap would be equivalent to ~5.4% of US GDP. In practical terms, that productivity delta shows up in inconsistent pricing discipline, weak routing density, underutilized technicians and informal accounting controls. A rigorous QoE should quantify these operational realities, not merely adjust for accounting items.

Strong QoE work goes beyond add backs. It should surface customer and supplier concentration, identify undisclosed related party transactions, reconcile revenue to job level or contract level data and evaluate the consistency of margin by segment. It should normalize owner compensation to market benchmarks and tie adjusted EBITDA to cash conversion through receivables aging, inventory turns and vendor payment terms. If EBITDA grows but cash does not, that gap must be explained before capital is deployed.

Working capital is equally critical. Many lower middle market businesses operate with seasonal swings in receivables or inventory. A QoE should establish a normalized working capital target to ensure that post closing liquidity is sufficient to sustain operations. Misjudging working capital needs can erode returns even if EBITDA performs as expected.

For buyers focused on residential and commercial services, independent QoE work provides a shared factual baseline with management. It supports thoughtful structuring around recurring revenue and adjusted EBITDA. It informs leverage decisions and protects against overcapitalization. Most importantly, it increases the probability that what appears to be EBITDA on paper behaves like EBITDA in cash over time.

In fragmented services markets where consolidation is accelerating, quality of earnings is not a box checking exercise. It is the discipline that separates reported performance from durable economics. The difference between the two is often where value is created or destroyed.

Photo by Adobe Stock Images

Commercial maintenance contracts are quietly regaining the upper hand across home and essential services. This shift is not the result of short-term demand spikes or temporary dislocations. It is being driven by structural advantages embedded in how commercial service relationships are contracted, priced and enforced. As volatility persists across labor, materials and financing, commercial maintenance is increasingly behaving less like episodic services work and more like contracted operating infrastructure.

Data from Mordor Intelligence highlights the durability of this trend. Rising leasing activity, higher building utilization and tighter operational oversight across U.S. commercial properties are driving sustained demand for outsourced maintenance and facility services. Unlike residential work, which remains heavily influenced by homeowner sentiment and discretionary spending, commercial maintenance demand is tied directly to asset uptime, regulatory compliance and tenant retention.

This is evident in the growth of integrated facility management. Mordor Intelligence estimates that global IFM spending will expand from ~$190 billion in 2024 to ~$290 billion by 2031, implying a compound annual growth rate of ~7%. Hard services such as HVAC, electrical, plumbing and mechanical maintenance account for more than one third of total IFM spend. These services are increasingly viewed by owners and operators as non-optional operating inputs rather than discretionary line items.

Contract structure sits at the core of the outperformance. Commercial maintenance agreements are typically multi-year in nature, often spanning three to five years, with renewal rates supported by switching costs, regulatory requirements and operational risk considerations. Research summarized by Philip A. Saunders shows that commercial contracts frequently bundle preventive maintenance, inspection schedules and response time guarantees into a single scope. This structure drives higher average contract values and materially stickier customer relationships than residential service, which remains largely transactional and event-driven.

Pricing mechanics further widen the gap. Commercial maintenance agreements commonly include built-in annual escalators tied to CPI, labor indices or negotiated cost pass-throughs. Academic research published on arXiv demonstrates that escalation mechanisms materially improve margin stability by allowing pricing to adjust in step with cost inflation, reducing the need for renegotiation and lowering churn risk. Residential providers, by contrast, often absorb wage, fuel and materials inflation until pricing can be reset job by job, compressing margins during periods of cost volatility.

Inspection and compliance cycles add another layer of resilience. Facility management research published by BVG India notes that commercial HVAC, electrical, fire and life safety and mechanical systems are subject to recurring inspections mandated by municipalities, insurers and lease agreements. This inspection-driven work represents one of the least elastic components of service demand. Even during economic slowdowns, compliance requirements persist. Residential demand remains far more sensitive to housing turnover, interest rates and household budget pressure.

These structural advantages translate directly into valuation outcomes. Research cited by Founders Investment Banking shows that home services businesses with meaningful recurring revenue streams consistently command higher valuation multiples due to improved cash flow visibility and reduced earnings volatility. Commercial maintenance portfolios benefit disproportionately because contract stickiness and pricing escalators convert revenue into predictable, infrastructure-like cash flows that underwrite leverage and support disciplined growth.

The takeaway is not that residential services are weakening. Rather, commercial maintenance is structurally better positioned in an environment defined by inflation, labor constraints and capital discipline. Contract duration, built-in pricing power and inspection-driven service cycles quietly compound into steadier margins and lower risk profiles. As volatility persists, commercial maintenance is increasingly functioning as operating infrastructure rather than cyclical services work.

WestGate Partners (WGP) is an independent sponsor focused on acquiring and growing lower middle market businesses in essential residential and commercial services. We bring institutional experience, tailored capital with hands-on partnership to help owners transition, grow and preserve their legacy. By partnering with strong operators, we build enduring businesses in economically-insulated industries.