Work record / Capital / Trade Services Buy-Side Diligence

Trade-services diligence: run the cheapest test first

This is a live deal, and the numbers here come from negotiation still under way. I changed the job from checking a broker's figure to asking what a buyer actually inherits.

The seat

I lead buy-side diligence, working through Common Ground for HighTide Capital Group as the acquirer. I also hold the Operations and Integration Lead seat there. The work began in 2025, in Arizona, and it is ongoing.

What I was brought in to decide

This deal is still live, and the figures below come from a negotiation that has not closed.

HighTide Capital Group buys trade-services companies in Arizona that owner-operators run, and holds them. Every target arrives with a package from the seller's broker: a headline EBITDA figure and an asking price built on it. Eleven targets across ten trades came through the engagement.

As first scoped, the job was to check each broker's number. I argued that this was the wrong job. Given the seller's books, a broker's figure is usually sound arithmetic. A set of books can support several defensible figures, and the one presented tends to be the largest. Checking it tells you nothing about whether the earnings survive a change of owner, and that is the only question a buyer pays for.

The first target showed it. It was a commercial painting contractor in its 48th year, with two retiring brothers, defensible books and a loyal crew. Its customer list was built on relationships that the brothers personally held. No part of the package was false. But the way the owners paid themselves, how many managers the business required, and the amount the company owed the state were all owners' choices, and none passes to a new owner.

What we did

• Before the first target, I re-scoped the work. Every target after it then went through the same three tests in the same order, so results can be compared across trades.
• The liability search went first. It looks at remittance history for state and local tax, claims that are pending, and any obligation the owner carries that travels with the entity. It is the cheapest test, and it shows what a buyer inherits whatever the price. Arizona's transaction privilege tax falls on the business itself, not on the customer as a sales tax, and contracting is a taxed classification. Any unremitted balance therefore stays inside a corporation the buyer purchases.
• Customer concentration came second. I ranked revenue by customer, stated the top-two and top-five shares, and asked whose relationships those customers are. A multiple puts a price on earnings, not on who owns them.
• The earnings rebuild came last, at two staffing levels. In one, a single market-rate manager replaces the owners' draw. In the other, the fully staffed case, a second manager is added, as a new owner would need. I benchmarked each manager's cost to what the seat costs fully loaded. Showing two figures makes the choice about how the business will be run visible.
• We took findings to the sellers as findings, largest first, with two structures to choose from instead of one quiet haircut. One path is cash, which prices certainty. The other is a partnership, which prices customer retention.
• I ran the full protocol on a second painting contractor that the numbers favored. Its ask rested on seven months annualized. Rebuilt on filed returns, earnings came in under what the ask requires. The backlog and receivables did not hold up as presented either, and most of the signed work sat with a few general contractors. Our recommendation was an offer under the ask. Cash would be priced on the filed years, plus backlog paid only when it delivers.
• The broker on an HVAC target cut the ask twice before any test had reported. A technology target passed all three tests cleanly and we referred it out, since it fell outside the buy box, which is trade-service delivery run by owner-operators.
• I graded each exposure finding on a severity scale measured against the original ask. Critical is a finding worth at least 35 percent of the ask, or a top-two customer share over 50 percent of revenue. High is 15 to 35 percent of the ask, or a top-two share between 30 and 50 percent. Anything lower is medium. A blank is never a pass.
• For any liability we found, the standing method is to buy the assets into a new entity and make a state tax clearance a condition of the close. We withhold part of the price and keep a right of offset against any seller note. The selling corporation also has to stay funded above a net-worth floor for a set period after closing.

Results

• On the first target the liability search turned up a $472,000 state tax lookback, the largest single number in the deal, before the earnings rebuild had started.
• Two customers, both builders and both the owners' own relationships, accounted for 97 percent of revenue.
• The broker's adjusted EBITDA was about $436,000. The rebuild put earnings at $297,000 with one market-rate manager paid, and at $181,000 with full staffing, the floor case.
• The ask came down from $1.2 million to $800,000. I put two structures under it. The cash path is $775,000. The partnership path is $600,000 fixed, with a contingent component tied to customer retention. Giving the counter is still my call.
• Across the portfolio, two targets repriced, one passed clean, and the broker cut the ask on one before the tests reported. Seven targets remain in process. The biggest number came from the cheapest test, and the smallest from the most expensive. The ordering rule holds so long as the cheap test can find what the expensive one cannot.
• What is now in place: the three-test protocol, the severity scale, a findings register for each target, and a two-level earnings bridge template. We also have a rule that any finding big enough to move price reaches the seller named as a finding, along with more than one structure to pick from.

The lesson

Run the cheapest test first. The answer that can kill a deal should cost the least to find.

Firm record

Common Ground keeps its own account of this engagement: Trade Services Buy-Side Diligence on the Common Ground wiki.

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