EXIT & VALUATIONA buyer’s analyst is sitting in your conference room with a laptop and a checklist. She has been through your P&L, your fleet, your service agreements. She is polite and she is fast.
Then she asks a question nobody has ever asked you before.
“What are you carrying on warranty obligations?”
And you realise you don’t have a number. You have a promise — a good one, one you’ve kept for twenty years — but you don’t have a number.
That pause is the trap. Not the warranty. The pause.
What the promise actually is, once somebody prices it
You told every customer you’d stand behind the install. Your techs repeated it at the kitchen table. It won you jobs and it’s the reason people call you back.
None of that is in dispute. What’s in dispute is what it is on paper.
To a buyer’s team, a promise to perform future work at your own cost, with no entity behind it and no money set aside, is an obligation. They don’t care that you’ve always covered it. They care that they can’t measure it — and anything they can’t measure, they price defensively.
Three ways it shows up in your number
This is the part most owners don’t see coming, because none of it happens in a conversation about warranties. It happens in a conversation about price.
They knock the price down
The simplest move. An unquantified obligation becomes an estimate, the estimate becomes conservative, and the conservative estimate comes off the offer. You never see a line item that says “warranty.” You see a number that’s lower than the one you were told to expect, and an explanation you can’t argue with because you don’t have the data to argue with it.
They hold money back
If the exposure is big enough or vague enough, it doesn’t come off the price — it comes out of your hands. A portion of the proceeds sits in escrow for twelve or eighteen months while the obligation runs. You sold the business. You just don’t have all the money yet, and whether you get it depends on how many claims come in.
They stop trusting the rest of the file
This is the expensive one and nobody warns you about it.
Diligence is a confidence exercise. When a team finds one liability the seller hadn’t accounted for, they don’t fix that line and move on — they start wondering what else isn’t accounted for. Everything after that gets a harder look. Deals don’t usually die on the warranty question. They die on the third thing that turned up after it.
“If you ever consider selling, ‘we honor our own warranties’ doesn’t fly with a private equity group.”
— Mike Barnhart, co-owner & CFO, ECO Plumbers
The version where somebody else runs it isn’t better
Plenty of owners read the above and think: fine, that’s why we use a third party. Somebody else carries it, somebody else pays the claims, nothing sits on our books.
True. And here’s what happens instead.
The buyer looks at your installed base — every unit you’ve put in, every customer who’ll need service — and sees revenue attached to it that flows somewhere else. It’s real, recurring, contracted revenue. It’s just not yours to sell.
So you get the worst half of both: no liability, and no asset either. A buyer isn’t discounting you for it. They’re just not paying you for it.
What “documented” actually changes
The fix isn’t a better promise. It’s the same promise, written down somewhere that can be examined.
When the warranty runs through a structure you own or take part in, four things change in that conference room:
- She gets a file instead of a pause. Entity, contracts in force, claims history, what’s set aside. The question has an answer.
- The obligation has a number beside it. Priced obligations get priced. Unpriced ones get guessed at, and the guess is never in your favour.
- The revenue is on your side of the line. The money customers pay for warranties runs into a company you have a stake in, so it shows up when somebody values what you’re selling.
- Somebody else explains it. Nobody expects a shop owner to walk an analyst through the structure. Whoever administers the program does that part.
Your customer notices none of this. Your techs sell exactly the way they sell now. The only thing that changed is that the promise became something a buyer can put a number on.
Where you are right now
Every shop is already in one of three positions, whether anybody has looked or not.
- A handshake nobody has costed. It reads as an obligation and gets treated like one.
- A third party’s program. Real revenue on your customers, on their books.
- A program you own or take part in. Documented, funded, and transferable — the only version that helps you at the table.
You don’t have to be selling for this to matter. The position you’re in is set years before anyone asks the question, which is exactly why the question is a bad time to find out.
That’s the whole point of this article. The analyst’s question has an answer today. You just haven’t been asked yet.
Questions owners ask
Do buyers actually check warranty obligations during due diligence?
Yes. Warranty and service obligations are a standard line on a diligence checklist, alongside financials, recurring revenue, owner dependence and customer concentration. What varies is how much attention it gets, and that depends on whether the seller can answer the question with documentation or has to explain it.
Can an informal warranty reduce the sale price of a trades business?
It can, in three ways: a direct reduction in the offer to cover an unquantified obligation, an escrow holdback while the obligation runs off, or a broader loss of confidence that leads a buyer to scrutinise everything else more closely. The third is usually the most expensive and the least visible.
Is it better to use a third-party warranty company when I sell?
It removes the liability, but it doesn’t create an asset. The recurring revenue attached to your installed base belongs to the third party, so a buyer sees revenue connected to your customers that isn’t yours to sell. You avoid the discount without gaining the value.
How far in advance should I sort this out?
It’s a structural change rather than a slow one, which makes it different from most exit preparation. Building recurring revenue or reducing owner dependence takes years. Documenting how warranties are held is something you set up once — but it needs to be in place and running before anybody looks, not while they’re looking.
What does a buyer want to see instead?
A file. Which entity holds the obligation, what contracts are in force, what the claims history looks like, and what’s set aside against future claims. The specific numbers matter less than the fact that the numbers exist and can be verified.