Originally published as a featured column in the January/February 2026 Issue of Indoor Comfort Marketing.
The pace of mergers and acquisitions in our industry has continued at a consistent clip, but most companies haven’t felt it. Because when we look deeper, we see that strong acquisition activity has been clustered around companies of a certain premium size or companies that are exhibiting predictable earnings and healthy free cash flow. It would be wonderful if all your businesses fit into those categories, but most of the companies in our industry don’t. A large portion of the lower middle market companies where so many of our industry resides, has been facing softer valuations, limited capital availability and slow, cumbersome bank approval processes. But as the Bob Dylan song title goes, the times they are a-changin’. And these changes may just spawn a revival of sorts in the lower middle market that will lead to increased dealmaking in the new year.
A Look Back at the Last Few Years
In recent years, new private capital sources – which included non-bank lenders and smaller-focus equity providers –stepped in to fill a void left by more conservative traditional banks. In fact, the support in the private credit market, including the leveraged lending arena for acquisition financing, roughly quadrupled over the past decade and according to PitchBook now accounts for $1.1 trillion in U.S. credit assets. Strategic and financial buyers continued to transact with these alternate sources of support, though at a muted pace in 2025. Competition was intense for top-quality companies, especially those with scaled propane operations or pure-play HVAC platforms. In contrast, many smaller buyers and sellers were sidelined by tighter credit and downward pressure on valuations. Those who undertook an acquisition have been forced to rely on creative deal structures or endure a lengthy traditional bank credit process to coax their deals over the finish line.
Signs of Life in the New Year
Published data and market activity shows that merger and acquisition activity within the fuel distribution and HVAC space – and in the lower middle market as a whole – has been building since the third quarter of last year. We are also observing that capital providers are showing modestly higher tolerance for leverage in acquisitions and recapitalizations as reflected in an increase in acceptable debt to EBITDA ratios. Will this materially benefit the broad base of small and mid-sized fuel and HVAC business owners seeking to keep pace in a rapidly consolidating marketplace? It’s an open question that will play out in the coming months, but we believe the answer is “yes”.
A Regulatory Tone Shift
One side effect of the tighter credit standards employed by traditional banks following the 2008 financial crisis and the resulting migration to alternative financing was that a large volume of transactions were pushed into the private credit realm and outside of direct bank regulatory oversight. In response, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency issued an interagency statement in December that softened guidance on leveraged lending used to support acquisitions. This regulatory shift by the new administration may seem small, but could
be significant, as it is intended to expand access to senior debt to foster business growth across all sectors. While the largest acquirers are likely to benefit first, the change in tone across banking combined with the potential for lower interest rates may prove to be just the boost needed to unlock activity for a wider swath of middle market buyers and sellers.
The Tools Change but the Goal Remains
The easing of traditional bank lending standards will be a welcome development for many small business executives, but the impact is likely to be incremental over the course of the year. Many fuel and HVAC companies have experienced uneven performance over the last few years due to challenges ranging from rapidly rising operating expenses to persistent staffing difficulties to warm weather (although as of this writing, we’re all enjoying a wonderfully cold start to the heating season!). For these companies, the path forward should include a focus on creative deal structuring and aggressively establishing higher profitability in order to enter expanded markets and business lines. Establishing a dialogue and building relationships with a diverse range of capital sources that can potentially help your business act quickly and confidently on a transaction in today’s environment is arguably much more important than simply searching for the lowest headline cost of capital.
The massive impact of new private capital sources that have sprung into existence over the past decade is now a permanent feature of the capital landscape. We continue to advocate that finance leaders in the home heating and cooling industry recognize that a growing pool of large – and not-so large – companies are using private credit solutions as part of their capital mix. As deep-pocketed strategics and private equity firms ramp up activity as the landscape improves in the lower middle market, it is important that business leaders in this fragmented industry make clear choices about growth versus exit. A thawing credit environment can support either path, but it is critical to position your company for your desired outcome with an understanding of how the shifting landscape of credit sources can best achieve this goal. The winners will be those that strengthen profitability, professionalize their capital relationships and proactively position themselves to capitalize on opportunity. The companies that will miss out are those that decide to wait until they think the conditions are “perfect.” And as most of us in this industry already know, there is no such time as “the perfect time.”
Jeff Simpson is the founder and managing member of Notch Capital, a private investment firm specializing in buyouts and recapitalizations of lower middle market businesses in the heating, cooling and home services industries. Notch Capital also provides advisory services to help these businesses strengthen their performance and analyze acquisitions.