Red Flags Report — Broker Only

Listing: Desert Sun HVAC | Las Vegas / NV | HVAC Contractor (Residential + Light Commercial)

Report Date: May 9, 2026

Prepared: Broker-only audit — NOT for seller distribution

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1. Deal Killers

Itemized review of critical issues that could terminate a deal in diligence:

Bottom line: No hard deal-killer is confirmed. Item #8 is a gating item that must be resolved before this listing can be priced or marketed. Items #3, #5, #6, #7 are standard pre-listing diligence gaps the broker should close before producing a CIM.

Missing inputs:

• Missing: 2025 net profit / loss — Impact: SDE cannot be calculated; asking price has no anchor; the entire valuation conversation is blocked. Broker action: pull the 2025 tax return (Form 1120-S / Sch C / 1065) and request a 2026 YTD P&L through April.
• Missing: Lease term, remaining months, renewal options, monthly rent — Impact: A short or non-renewing lease at a single-location service business is a structural valuation hit; cannot quantify until known. Broker action: request the current lease + any executed amendments/extensions.
• Missing: Pending litigation, demand letters, NSCB license status — Impact: Any open contractor-board complaint or active litigation is grounds for a buyer to walk in diligence. Broker action: NV NSCB license lookup + signed seller rep on no-litigation/no-claims.
• Missing: Tax-lien / UCC / payroll-tax status — Impact: Liens on assets block an asset sale and surprise buyers in week 4 of diligence. Broker action: order UCC + tax-lien search in NV; have seller sign IRS Form 8821.
• Missing: Accounting method + outside CPA review status — Impact: Determines SBA lender-readiness and QofE confidence. Broker action: ask whether books are Cash or Accrual and whether a CPA prepares or reviews returns.

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2. Financial Red Flags

Anchored to intake figures only. SDE cannot be computed without 2025 net profit, so margin analysis below is partial.

Missing inputs:

• Missing: 2025 net profit, full add-back schedule (owner comp normalization, personal vehicles, health insurance, owner-paid travel/meals, one-time expenses) — Impact: SDE is the entire pricing input; without it, every dollar figure in this report is a placeholder. Broker action: complete a full SDE normalization worksheet with the owner before listing.
• Missing: Written-contract status on the 60% recurring base — Impact: Determines whether the multiple sits in the 4x–6x SDE band (contracted recurring) or 3x–4x band (repeat but not contracted). Industry benchmark — not specific to this Company; broker to verify against current comp data. Broker action: ask the owner what % of the 1,800 residential maintenance customers are on signed annual/multi-year agreements vs. month-to-month or year-by-year handshake.
• Missing: 2026 YTD P&L through April — Impact: Confirms whether 2025's 29.7% jump is the new baseline or a peak. Broker action: pull QuickBooks YTD + monthly trial balance.
• Missing: Fleet count, vehicle ages, last 3 years of CapEx — Impact: Deferred-CapEx post-close exposure. Broker action: get a fleet schedule (year, make, model, mileage) + 2023–2025 fixed-asset additions from the depreciation schedule.
• Missing: AR aging at most recent month-end — Impact: Working-capital peg negotiation. Broker action: pull a current AR aging report.
• Missing: Related-party / family-payroll disclosure — Impact: Hidden expense normalizations the buyer will find anyway. Broker action: direct question to seller; document responses.

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3. Sellability Score

Each dimension scored 0–10. Weights total 100%.

Sellability Score: 5.2 / 10

Read: This is a listable business with real assets (revenue trajectory, low concentration, recurring base, 22-year tenure, NV market) but is not list-ready today. The score will move to 6.5–7.0 with 60–90 days of pre-listing cleanup (Section 4). Going to market today risks (a) a botched price discovery if buyers see incomplete financials, and (b) deal failure in diligence on the gaps in Section 1.

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4. Pre-Sale Improvement Recommendations

Ranked by valuation impact, highest first.

#1 — Complete SDE normalization with full P&L + add-back schedule

• Action: Pull 2023, 2024, 2025 tax returns + 2026 YTD P&L. Build a defensible add-back schedule: owner W-2 + distributions, personal vehicle, health insurance, owner-paid travel/meals, one-time expenses. Reconcile to bank deposits.
• Timeline: 3–4 weeks
• Valuation impact: Gating — without this, no listing. Likely surfaces $80K–$200K [ESTIMATED — assumes typical owner-operator add-back patterns in HVAC; broker to verify against actual P&L] in legitimate add-backs that lift SDE materially. At a 3.5x multiple, every $50K of additional defended SDE = $175K in value [CALCULATED].
• Cost: $2,500–$5,000 (CPA review or QofE-lite)
• Confidence: High

#2 — Convert handshake recurring customers to written annual service agreements

• Action: Get as many of the 1,800 residential maintenance customers as possible onto signed annual agreements (auto-renewing, ACH on file). Even a 6-month sprint can convert 30–50% of the base. Industry benchmark — not specific to this Company; broker to verify against current comp data.
• Timeline: 4–6 months
• Valuation impact: Multiple lift from ~3.0–3.5x to 4.0–4.5x SDE on the recurring portion. Industry benchmark — not specific to this Company; broker to verify against current comp data. On contracted SDE of, e.g., $400K, that's a +$200K–$400K [ESTIMATED — based on 0.5–1.0x multiple expansion applied to a placeholder SDE; will be re-quantified once SDE is known] valuation lift.
• Cost: $5K–$15K (campaign + CRM workflow + minor incentive)
• Confidence: High

#3 — Document the customer-service playbook + designate an operations lead from the existing 10 FT staff

• Action: Finish the in-progress customer-service playbook. Identify a working foreman or service manager from the existing crew, give them a title, and have them shadow owner-held vendor + key-account relationships for 60–90 days. This is the single biggest mitigant for the 90-day-only transition risk.
• Timeline: 2–3 months
• Valuation impact: Removes the key-person discount. Likely +0.25–0.5x on the multiple. Industry benchmark — not specific to this Company; broker to verify against current comp data.
• Cost: $5K–$10K (modest comp bump for the designated lead, SOP authoring time)
• Confidence: Medium-High

#4 — Lock the lease with a renewal or extension before going to market

• Action: Negotiate a 5-year extension (or 3+2 option) with the current landlord at known rent. A buyer will not finance an SBA loan against a sub-2-year lease.
• Timeline: 30–60 days
• Valuation impact: Prevents a structural valuation hit; makes the listing SBA-eligible. No incremental lift, but removes a $150K–$400K [ESTIMATED — based on typical small-business valuation impact of lease uncertainty; broker to verify] downside risk.
• Cost: Legal $1.5K–$3K
• Confidence: High

#5 — Extend owner's post-close commitment beyond 90 days

• Action: Soft-pitch the owner on a 6–12-month consulting tail at part-time hours (10–15 hrs/wk) at a fair monthly retainer. 90 days for a 22-year-tenured retiring owner is materially short and will compress price.
• Timeline: Conversation, 1 week
• Valuation impact: Removes the second-largest discount lever buyers will use. Likely +0.25x multiple. Industry benchmark — not specific to this Company; broker to verify against current comp data.
• Cost: $0 to broker; owner negotiates retainer with buyer.
• Confidence: Medium (depends on owner willingness — he said "no long-term employment")

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5. Broker Advisory Notes

Suggested listing price range

Cannot be priced today. SDE is uncomputable until 2025 net profit lands. Once SDE is known, working assumption for opening discussion:

• Floor: SDE × 3.0 (no recurring contract conversion, no operations-lead designation, baseline transition)
• Mid: SDE × 3.75 (current state, assuming clean books and clean lease)
• Ceiling: SDE × 4.5 (post-cleanup: contracted recurring, named ops lead, 6–12 month owner tail)

Industry benchmark — not specific to this Company; broker to verify against current comp data. The 2026 HVAC SDE comp range cited in the market scan (2.7x–5.1x average; premium recurring 4x–6x; install-heavy 2x–4x) is consistent with this framing.

The growth trajectory ($1.6M → $1.85M → $2.4M [VERIFIED]) and the 60% recurring label [VERIFIED] argue for the upper half of the band IF the cleanup work in Section 4 is completed. Without cleanup, this lists in the 3.0–3.5x SDE zone.

Recommended deal structure

• Asset sale, not stock. Standard for an NV S-corp/LLC HVAC contractor; protects buyer from successor liability on warranty/installation claims.
• Seller financing: 10–15% of purchase price. SBA 7(a) is the most likely buyer financing path here (revenue size + recurring profile fit SBA lender preferences); SBA generally requires 5%+ standby seller note. 10–15% strengthens lender posture and shows seller confidence.
• Earnout: avoid if possible. A retiring 22-year owner with only 90-day transition has minimal leverage to influence post-close performance, so an earnout structure is misaligned. If the buyer insists, cap at 10% and tie to revenue retention of the existing customer book over 12 months — not EBITDA.
• Working capital peg: Negotiate hard. With 40% project revenue [VERIFIED] = $960K [CALCULATED], the AR balance is material. Get the peg defined off a trailing-3-month average to prevent a dollar-for-dollar give-back at close.
• Non-compete: 5 years, 50-mile radius from Las Vegas. NV enforces reasonable non-competes in business-sale context.

Negotiation points to hold firm on

• Multiple defense via recurring %. Don't let buyers re-cut the 60% recurring figure as "repeat" instead of "recurring." Push for the contracted-recurring framing if the cleanup work in #2 is done.
• Add-back integrity. Owner comp at $95K [VERIFIED] is below replacement-GM cost in NV; the normalization will involve a negative add-back (replacement comp deduction). Anticipate this and price it in the model — don't let the buyer "discover" it as leverage.
• Working capital peg method — see above.
• No personal guarantee on the seller note. Standard ask from buyers; resist beyond the buyer's personal guarantee already going to SBA.

Buyer profile recommendations

Primary target — Individual buyer / search fund / SBA-financed operator-buyer:

• Mid-career operator with general-management or trades background
• $400K–$700K liquid for down payment (assuming purchase in the $1.5M–$2.5M range)
• NV / Southwest preference; relocation candidates acceptable given Las Vegas growth
• Someone who'll move into the GM seat the existing owner is vacating

Secondary target — Regional HVAC consolidator / private-equity-backed platform:

• 2024–2026 has been an active rollup window in residential HVAC services. Several PE-backed platforms are buying $300K–$1.5M SDE bolt-ons in Sun Belt markets. Industry benchmark — not specific to this Company; broker to verify against current comp data.
• These buyers will pay a premium for the recurring base + Vegas geographic footprint but will discount aggressively on the documentation gaps. Best fit after cleanup.

Avoid: First-time buyers with no trades or operations background — the 90-day transition window will not be enough runway for them, and the deal will collapse in Year 1.

Soft-pedal vs. proactive disclosure

Disclose proactively (better to lead than be found):

• The 2025 revenue jump and its driver — get ahead of the "is this sustainable?" question with a clean explanation supported by 2026 YTD data.
• Owner's 90-day-only transition — frame the operations-lead designation (Section 4 #3) as the mitigant.
• "Partially documented" SOPs — frame as work-in-progress with named owner of completion.

Surface only on inquiry (not deceptive — just don't lead with):

• Specific customer names within the top-5 32% [VERIFIED] (NDA-gated)
• Employee compensation detail (post-LOI)
• Vendor terms and supplier relationships (post-LOI)

Must investigate before going to market (cannot be "soft-pedaled" — these are diligence-killers if surprises):

• NV NSCB contractor-license status, any open complaints or board actions
• Pending litigation, demand letters
• Tax liens, UCC filings, payroll-tax status
• Lease term and renewal posture

Listing strategy

Targeted, not broad. This listing's value is in (a) the recurring residential base and (b) the Vegas geographic footprint. Both attract specific buyer profiles — searchers and HVAC consolidators — that the broker can reach through direct outreach + 2–3 curated marketplaces (BizBuySell + a vertical-trades listing service + a search-fund email list). Broad listing dilutes the buyer pool with tire-kickers and creates unnecessary disclosure exposure.

Recommended sequencing:

• Weeks 1–4: Close the gating items (Section 1) + complete SDE normalization (Section 4 #1).
• Months 2–4: Execute Section 4 #2, #3, #4, #5 in parallel.
• Month 5: CIM goes to market.
• Months 6–9: LOI window; prefer one good buyer over a bidding-war fiction with this profile.
• Months 10–12: Close, aligning with owner's stated 12-month timeline [VERIFIED].

The owner's 12-month timeline is realistic only if the cleanup work starts immediately. Going to market in 30 days against this dataset will under-price the business by an estimated 15–25%. Industry benchmark — not specific to this Company; broker to verify against current comp data.