Three Years of Financials Looked Clean. The Business Still Collapsed Within a Year.
Dan Burnside had worked in analytics at Silicon Valley Bank, reviewing cash flows for private equity clients, before deciding to buy a business of his own rather than keep trading time for someone else's payroll.
A deal that looked good on paper
As recounted on the podcast, Burnside bought Parker Mechanical, a rural HVAC contractor in Colorado, for $2.1 million against $800,000 of seller's discretionary earnings, under a 3x multiple, a genuinely attractive price for the category. The deal was structured with an SBA loan, a $400,000 working capital revolver, and a verbal commitment from the seller to stay on for three months of training.
Three years of reviewed financials hadn't shown anything alarming. What they didn't show surfaced almost immediately after close.
What the numbers didn't capture
Within days of closing, Burnside discovered that 15% of the business's revenue came from plumbing work the company wasn't actually licensed to perform. His lawyer told him unwinding the deal legally would take years and cost hundreds of thousands of dollars, effectively no exit.
Then the business's key relationships unraveled. The previous owner's business partner and his son left to start a competing shop, taking with them roughly a third of the company's profit and the only two employees trained in commercial refrigeration. Within a week, several other technicians did the same thing, tripling local competition almost overnight.
On top of that, Burnside found that 15-25% of the business's reported EBITDA had actually been paid out as unreported, under-the-table cash bonuses, meaning his real profitability was roughly half of what the historical numbers implied once that pay was properly run through payroll. The coolest summer in 25 years crushed seasonal demand at the same time COVID relief funds that had propped up recent school-contract revenue expired.
Despite earning his own master mechanical contractor license and building a new pipeline of commercial general-contractor work, Burnside couldn't outrun the combination of problems. He eventually shut the business down and filed for personal bankruptcy.
Lessons for the buyer
- A clean multiple doesn't mean a clean business. A 3x multiple on $800,000 of SDE looks like a bargain right up until you learn what's actually inside that SDE number.
- Ask what percentage of revenue depends on licenses, certifications, or one specific person holding them. Unlicensed work and single-person expertise (like the only staff trained in a specialty) are both catastrophic risks that a P&L will never flag on its own.
- Off-the-books compensation is a red flag, not a bonus you inherit for free. If employees are used to undocumented cash pay, converting it to legitimate payroll can gut your real margin overnight, and refusing to pay it can gut your workforce just as fast.
- A seller with no financial stake in the transition has little reason to make it go well. An all-cash deal with no seller note and no holdback removes the seller's incentive to actually show up, train your team, or tell you the parts of the business that don't show up in three years of statements.
- Concentration risk isn't just about customers. A handful of employees walking out the door, in a rural market where you can't easily rehire, can matter just as much as losing your biggest client.