SAMPLE DILIGENCE ANALYSIS
The listing says $400K. The tax return says $310K.
This is a complete Diligence Analysis. It is the same one a buyer sees after uploading a deal's documents. Every figure is recomputed from the financials and cited to its source. Read it end to end.
Illustrative example. “Summit Comfort Heating & Air” is a fictional business. The figures are made up, to show what the engine produces. No real seller data appears on this page.
HVAC & Plumbing · Greenville, SC
Summit Comfort Heating & Air
16 years, owner-operated · ~40% recurring maintenance-contract revenue
$1.15M
Asking price
HVAC & Plumbing · Greenville, SC
Summit Comfort Heating & Air
16 years in business
Owner-operated residential HVAC and plumbing business with ~40% recurring maintenance-contract revenue.
A real business worth pursuing — but at $310K of verified earnings, not the $400K on the listing. Reprice or restructure before you sign.
Seller states $400K SDE. Verified $310K — overstated by 23%.
See the 3 add-backs that don't hold — with source & reason →Why
- The 23% SDE overstatement is fully explained by add-backs that don't hold — recurring costs booked as one-time, and owner pay above replacement cost — so the downside is understood, not a mystery.
- The underlying business is durable: 16 years operating, ~40% recurring maintenance revenue, in a sector that finances well under SBA.
- At the true 3.7× multiple the deal is workable but no longer a bargain — the value now is in negotiating to the verified number.
What's blocking a confident call
- No 2024 interim / TTM P&L, so the current earnings run-rate is unconfirmed.
- Recurring-contract terms and customer concentration are undisclosed — both drive how transferable the revenue is.
Clarify with the seller
- Get the add-back schedule substantiated line by line against the returns.
- Confirm the recurring-maintenance contract base is assignable to a new owner.
Confidence: medium · advisor recommendation based on the verified analysis.
Your next move
The deal finances at 1.35× DSCR, but 3.7× is above the sector-typical range — negotiate on price. Every 0.25× off the multiple is about $78K off the asking.
01 · The catch
As listed vs. as verified
The seller's SDE and add-back claims, exactly as listed, next to the figure the documents actually support — every add-back that didn't hold up is struck through with why.
As listed
$400K
Seller's stated SDE
- Owner health insurance$9K
- One-time legal (entity restructure)$7K
- Owner compensation above replacement costThe seller added back the full $120K owner salary, but the business needs a working GM / lead technician to run day-to-day. A market-rate replacement is ~$74K, so only $74K is discretionary — the remaining $46K is not.$46K
- Owner's auto & travelBooked as one-time, but the same charge appears in all three tax years (2021–2023). A cost that recurs every year isn't a discretionary add-back.$28K
- 'One-time' equipment overhaulAppears in two of the last three years — this is recurring maintenance, not a genuine non-recurring event.$16K
· −22.5%
As verified
$310K
Rebuilt from the documents, add-back by add-back
- Owner health insurance$9K
- One-time legal (entity restructure)$7K
2 of the seller's 5 claimed add-backs held up against the documents — see "As listed" for what they claimed and why it didn't carry over.
The stated SDE of $400K overstates the documented earnings by $90K (23%). Recomputing from the 2023 federal return (Form 1120S) supports $310K. The gap is $90K of add-backs that don't hold up — personal auto and travel plus 'one-time' equipment repairs that recur every year, and owner pay added back above the cost of a replacement manager. Treat the seller's earnings as $310K until the add-back schedule is substantiated line by line.
Receipts — where these figures come from
SDE
Broker listing: $400K · Listing / add-back schedule
Recomputed: $310K · 2023 Form 1120S
Revenue (trailing)
Broker listing: $1.4M · Listing
2023 tax return: $1.3M · 2023 Form 1120S, line 1a
02 · Revenue & earnings quality
Is this revenue sustainable?
The earnings history behind the verified SDE — revenue and profitability across the years the documents cover.
03 · Normalizing adjustments
Add-back schedule
Every the seller claimed, judged against the documents. Standard owner adjustments are accepted; discretionary and related-party items are questioned or rejected.
| Add-back | Amount | Status |
|---|---|---|
| Owner's auto & travel · 2021–2023 Form 1120S — auto & travel Booked as one-time, but the same charge appears in all three tax years (2021–2023). A cost that recurs every year isn't a discretionary add-back. | $28K | rejected |
| 'One-time' equipment overhaul · 2022 & 2023 P&L — repairs & maintenance Appears in two of the last three years — this is recurring maintenance, not a genuine non-recurring event. | $16K | rejected |
| Owner compensation above replacement cost · Broker add-back schedule The seller added back the full $120K owner salary, but the business needs a working GM / lead technician to run day-to-day. A market-rate replacement is ~$74K, so only $74K is discretionary — the remaining $46K is not. | $46K | rejected |
| Owner health insurance · 2023 Form 1120S — employee benefit programs A personal benefit run through the business — a legitimate SDE add-back. | $9K | accepted |
| One-time legal (entity restructure) · 2023 P&L — professional fees A documented, genuinely non-recurring 2023 legal fee — a legitimate add-back. | $7K | accepted |
| Verified SDE add-backs | $16K |
04 · Deal economics & buyer returns
The deal — on verified earnings
Financeability, price-to-benchmark, and buyer returns on a standard structure.
Multiple vs. industry benchmark
Typical SDE multiple for Home & Trade Services (HVAC, plumbing, electrical, landscaping): 2.0×–3.5×. This deal: 3.7× (above range). Directional range from published broker/market data, reviewed 2026-06-24 — a guide, not a lender appraisal.
Cash to close — what you actually need
Estimates. Closing costs and the working-capital cushion are planning placeholders — the real working-capital need depends on inventory and receivables the seller hasn't disclosed. Confirm both before you make an offer.
Capital stack — SBA 7(a)
Year-1 take-home after debt service
Verified SDE $310K − annual debt service $168K. What's left in your pocket the first year — actual figures, no growth assumed.
What conveys at close — not specified
The documents don't itemize what's included in the sale. Ask for an asset list (equipment, vehicles, inventory) and confirm whether real estate is included and the lease is assignable to you.
05 · Risk & operating profile
Where the risk lives
The qualitative read the numbers miss — each signal cited to the document, rated context / watch / risk.
The owner is the lead technician and personally holds the top customer relationships — the business runs through them day-to-day. · Offering summary — 'About the owner'
~40% of revenue is recurring maintenance contracts, but the renewal rate and contract terms weren't disclosed. · Offering summary — revenue mix
Whether the maintenance contracts are assignable to a new owner is unconfirmed, and the brand is tied to the founder. · Offering summary
16 years operating in a home-services sector that finances well under SBA, with steady demand. · Offering summary — business overview
- Listing revenue ($1.4M) is $120K above the 2023 tax return ($1.28M) — confirm the period and what's included.
- ~40% of revenue is recurring maintenance contracts, but the contract terms, renewal rate, and transferability weren't provided.
- The owner is the lead technician and holds the top customer relationships — key-person risk on transition.
06 · Your diligence plan
What's missing, and what to ask
One checklist to take to the seller — the gaps the documents left open and the questions they raise, merged and deduped.
- Provide the 2021–2023 federal returns and a 2024 YTD P&L so SDE can be trended, not taken from a single year.
- Break down the $120K owner-compensation add-back: what would a market-rate GM / lead technician cost to replace the owner's day-to-day role?
- Itemize the 'one-time' equipment and auto/travel add-backs — which recur annually and which are genuinely non-recurring?
- What percentage of revenue is under recurring maintenance contract, what is the renewal rate, and are the contracts assignable to a new owner?
- What share of revenue comes from the top 3 customers, and how many predate the current owner's personal relationships?
- No 2024 interim or trailing-twelve-month P&L — the earnings trend since the 2023 return is unverified.
- Customer concentration undisclosed — the share of revenue from the top 3 accounts is unknown.
- The $12K 'marketing' add-back on the broker schedule has no supporting invoice or explanation.
- No equipment / vehicle list or fixed-asset schedule to confirm what conveys at close.
Confidence: medium — Recomputed from the 2021–2023 federal returns, which are high-quality — but there's no 2024 interim or trailing-twelve-month P&L, so the current run-rate since the last filed year is unconfirmed.
This is what verification looks like.
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