Advanced Normalization Schedule

Business: Desert Sun HVAC

Prepared For: Sample Owner

Prepared By: ClearValue Advisory · AI-Powered Business Analysis · bizvaluefree.com

Report Date: May 9, 2026

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TABLE OF CONTENTS

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• Purpose & Methodology ..................... 1
• Document Verification Status ..................... 2
• Standard Add-Back Schedule (Verified) ..................... 3
• Related-Party Transaction Normalization ..................... 4
• Owner-Paid Personal Expenses Allocation ..................... 5
• Working Capital Adjustment Analysis ..................... 6
• CapEx Normalization & Depreciation Policy Review ..................... 7
• Family Payroll Replacement-Cost Analysis ..................... 8
• Multi-Year Normalized SDE with Confidence Intervals ..................... 9
• Audit Trail Summary & Buyer Diligence Defense ..................... 10

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1. PURPOSE & METHODOLOGY

The Standard SDE Reconstruction (Deliverable 2 of Stage 1) establishes the headline weighted-SDE figure of $500,268 [CALCULATED]. This Advanced Normalization Schedule extends that work to the level of detail buyers' Quality of Earnings (QofE) advisors will require during due diligence.

The objective is twofold: (1) defend each add-back at the line-item level with rationale and source documentation, and (2) surface adjustments that go beyond standard SDE add-backs into the territory of related-party normalization, working-capital adjustments, and CapEx-policy reconciliation that buyers' QofE teams will examine.

Methodology:

• Each line item is presented with: dollar amount, rationale, document source, verification status, and confidence level.
• Verification status uses the four-tag protocol: [VERIFIED], [CALCULATED], [ESTIMATED], [INSUFFICIENT DATA].
• Confidence level is High / Medium / Low based on document support and owner-reported clarity.
• Where data was not captured at intake, the row is preserved with [INSUFFICIENT DATA] rather than omitted, so the broker can collect the data pre-listing.

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2. DOCUMENT VERIFICATION STATUS

No tax returns, P&Ls, balance sheets, or supporting documents were uploaded for this assessment. All financial figures are seller-reported as of the intake conversation on May 9, 2026.

Overall verification posture: All add-backs in this schedule are seller-reported. A buyer's QofE team will require source documentation to confirm. Pre-listing recommendation: have the seller's CPA assemble a normalization workpaper with line-item references to the underlying tax returns.

Missing inputs callout:

• Missing: Source documentation (tax returns, P&Ls, balance sheets, depreciation schedules) — Impact: Every add-back row is currently [VERIFIED — owner-reported] rather than [VERIFIED — document]. Broker action: request 3 years of tax returns and most recent balance sheet from the seller's CPA.

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3. STANDARD ADD-BACK SCHEDULE (VERIFIED)

The pre-calculated SDE reconstruction provided the following add-back structure for 2025. This section presents that schedule with the line-item rationale, source, and confidence assessment buyers will require.

Year-by-year confidence note: The 2025 column carries the highest confidence because the owner directly reported net profit. The 2024 and 2023 net-profit figures are pro-rated by revenue ratio at the most-recent margin — this is a reasonable approximation but a QofE team will recompute from actual tax returns. Variance of ±5-10% is plausible.

Missing inputs callout:

• Missing: Net profit / loss for 2024 and 2023 — Impact: SDE for those years is pro-rated by revenue ratio at the most-recent margin rather than computed from explicit P&L; weighted SDE may diverge from the buyer's QofE reconstruction by ±5-10%. Broker action: request the bottom-line net profit/loss from the seller's 2024 and 2023 tax returns.
• Missing: 2026 YTD revenue and net profit through May — Impact: Run-rate visibility for the buyer is incomplete; the headline weighted-SDE figure does not reflect 2026 trajectory. Broker action: request the seller's 2026 YTD P&L through April or May.

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4. RELATED-PARTY TRANSACTION NORMALIZATION

Related-party transactions are payments between the business and parties with shared ownership or family relationships — most commonly: real estate rent paid to an entity owned by the seller, equipment leases from a related entity, or intercompany loans.

Application to Desert Sun HVAC:

The seller reported a single business location in Nevada. The intake did not capture whether the operating real estate is leased from the operating entity, leased from a related entity (e.g., a real-estate LLC owned by the same individual), or owned by the operating business directly.

[INSUFFICIENT DATA — real estate ownership and rent structure not captured]

Why this matters for the QofE process:

If rent is paid to a related entity at a rate above market, the buyer will normalize rent down to market — increasing reported SDE but creating a valuation argument the seller will need to defend. If rent is paid below market, the buyer will normalize rent UP — decreasing SDE. Either direction is dollar-significant.

Industry benchmark — not specific to this Company; broker to verify against current comp data. Las Vegas-area industrial / shop space for an HVAC contractor with 12 employees and a service-truck fleet typically rents in the $14-$22 per square foot annual range, with a typical footprint of 3,500-6,000 SF.

Recommendation:

• Confirm real-estate ownership structure with the seller.
• If owned by a related entity, obtain the lease and assess market-rate alignment.
• If the business owns its real estate, consider whether real estate is included in the sale or sold separately (real estate spinout is the more common — and tax-advantaged — structure for trades-business sales).

Missing inputs callout:

• Missing: Real estate ownership and rent structure (operating entity owns / related entity owns / leases from third party) — Impact: Cannot identify or normalize related-party rent. Broker action: ask owner whether the shop/office is owned by the business, owned by a related entity, or leased from a third party.

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5. OWNER-PAID PERSONAL EXPENSES ALLOCATION

Beyond the standard add-backs (health insurance, personal vehicle, owner W-2), QofE teams probe for additional personal expenses run through the business. The intake conversation captured the standard categories. This section probes for the secondary categories.

Categories examined and their status for Desert Sun HVAC:

Industry benchmark — not specific to this Company; broker to verify against current comp data. Owner-operators of trades businesses commonly run $5,000-$15,000 of additional personal expenses through the business beyond the standard health/vehicle add-backs. These are legitimate add-backs when surfaced, but require careful documentation.

Conservative estimate of unidentified personal add-backs: $5,000-$10,000 per year [ESTIMATED — assumes industry-typical pattern; not yet verified for this business]. This would lift weighted SDE by approximately $7,500 → $507,768, and at the 3.25x base multiple would lift asking price by approximately $24,375.

Missing inputs callout:

• Missing: Cell phone / travel / subscription personal-expense allocation — Impact: Add-backs in this category are frequently $5K-$15K/yr; absence understates SDE. Broker action: walk owner through each category with specific dollar prompts.

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6. WORKING CAPITAL ADJUSTMENT ANALYSIS

Working capital is the lifeblood that the buyer must finance from day one of ownership. The amount of net working capital (Accounts Receivable + Inventory − Accounts Payable) included in the sale price — versus retained by the seller or financed separately by the buyer — is a major negotiation point in the Asset Purchase Agreement.

Application to Desert Sun HVAC:

[INSUFFICIENT DATA — AR, AP, inventory balances and aging not captured at intake]

The structural framework buyers expect:

Industry benchmark — not specific to this Company; broker to verify against current comp data. HVAC businesses with a 60% recurring-maintenance / 40% project-work mix (like Desert Sun) typically carry net working capital equal to 8-15% of trailing twelve-month revenue. At 2025 revenue of $2,400,000 [VERIFIED — owner-reported], this implies a net-working-capital range of approximately $192,000 — $360,000 [ESTIMATED — industry-typical pattern; not verified for this business].

Why this matters at sale:

• The "peg" negotiation — The APA will set a Net Working Capital target ("the peg"); deviations at close trigger purchase-price adjustments.
• AR aging — Receivables more than 60-90 days old are typically excluded or discounted.
• Inventory verification — Buyers will require a physical count at or near close.
• Customer deposits — Maintenance contract deposits and project deposits are liabilities transferring to the buyer.

Recommendation: Pre-listing, have the seller's bookkeeper produce: (1) AR aging report at the most recent month-end, (2) inventory listing, (3) AP aging, and (4) a 12-month average-NWC calculation. These four documents settle ~80% of the working-capital negotiation in advance.

Missing inputs callout:

• Missing: AR balance + aging, AP balance + aging, inventory balance, customer deposits — Impact: Working-capital peg cannot be modeled; buyer will use this gap to negotiate down. Broker action: request balance-sheet snapshot and AR/AP aging reports from the seller's bookkeeper.

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7. CapEx NORMALIZATION & DEPRECIATION POLICY REVIEW

The standard SDE add-back of $32,000 [VERIFIED — owner-stated] for depreciation is treated as a non-cash item that should be added back to derive cash earnings. However, sophisticated buyers — particularly PE buyers and SBA lenders running QofE analysis — argue that recurring maintenance CapEx required to keep the business running should NOT be fully added back.

The CapEx normalization framework:

Application to Desert Sun HVAC:

The business operates a service-truck fleet (size not captured). [INSUFFICIENT DATA — fleet size]. With 10 FT employees, the implied service-tech count is roughly 6-8 (deducting office staff, owner, install crew). Assuming each service tech operates a dedicated vehicle plus 1-2 install vehicles, the fleet is probably 8-12 vehicles.

Industry benchmark — not specific to this Company; broker to verify against current comp data. A service-truck refresh cycle for HVAC contractors is typically 7-10 years per vehicle, with replacement cost $45,000-$75,000 per truck (fully outfitted). For an 8-12 truck fleet on a 7-year cycle, annual maintenance CapEx is approximately $50,000-$130,000.

The $32,000 reported depreciation is below the lower bound of this industry-typical range. Two possible explanations:

• The depreciation schedule is partially exhausted (older vehicles fully depreciated but still in service). In this case, $32,000 understates the true ongoing CapEx burden, and a buyer's QofE team will normalize SDE DOWN by the difference.
• The fleet is leased rather than owned, with lease costs flowing through operating expenses rather than depreciation. In this case, $32,000 may be an accurate representation of owned-asset depreciation.

Conservative QofE-style normalization adjustment: [ESTIMATED — assumes industry-typical fleet-replacement burden]. If buyer normalizes maintenance CapEx to $80,000/year vs. reported $32,000, the SDE adjustment is approximately −$48,000, reducing weighted SDE from $500,268 to $452,268 and base-case asking price from $1,625,869 to approximately $1,469,871 at 3.25x.

This is a real risk that should be modeled and discussed with the seller before listing.

Missing inputs callout:

• Missing: Service-truck and equipment fleet size, age, ownership (owned vs. leased) — Impact: Cannot reconcile $32K depreciation against industry-typical fleet-replacement burden; buyer QofE will probe this. Broker action: request a fleet schedule (vehicles + age + ownership) from the seller.
• Missing: Capital expenditure history for the past 3 years — Impact: Cannot benchmark stated depreciation against actual CapEx pattern. Broker action: request CapEx detail from the seller's CPA.

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8. FAMILY PAYROLL REPLACEMENT-COST ANALYSIS

A common SDE add-back is family member compensation that exceeds the cost of an arms-length replacement. The intake captured 10 FT + 2 PT employees but did not specify whether any are family members or whether their compensation is at, above, or below market.

[INSUFFICIENT DATA — family-member payroll status]

Framework if family members are on payroll:

Industry benchmark — not specific to this Company; broker to verify against current comp data. Owner spouses on small-business payroll are present in roughly 30-40% of trades-business sale candidates. The most common pattern is a spouse handling bookkeeping/admin at $40,000-$60,000 — slightly above what an outside hire would cost.

Replacement-cost benchmarks for typical HVAC roles (Las Vegas market):

Missing inputs callout:

• Missing: Whether any of the 10 FT / 2 PT employees are family members; their roles and compensation — Impact: Cannot identify family-payroll add-back, which is commonly $10K-$40K. Broker action: ask owner directly whether spouse, children, or other family members are on payroll, and at what comp.

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9. MULTI-YEAR NORMALIZED SDE WITH CONFIDENCE INTERVALS

This section consolidates the prior sections into a single picture of the SDE figure at three confidence tiers.

Weighted SDE Recomputed (1×2023 + 2×2024 + 3×2025) ÷ 6:

• Standard (per Stage 1): $500,268 [CALCULATED]
• With §5 personal add-backs only: $507,768 [ESTIMATED]
• With §5 added and §7 CapEx normalization applied: $459,768 [ESTIMATED]

Confidence Interval for Weighted SDE:

• Low end (conservative buyer QofE): $455,000-$470,000
• Mid (most likely): $490,000-$510,000
• High end (optimistic, all add-backs accepted): $510,000-$520,000

Resulting Asking-Price Range at 3.25x Base Multiple:

• Low: ~$1,478K-$1,528K
• Mid: ~$1,593K-$1,658K
• High: ~$1,658K-$1,690K

The Stage 1 base-case figure of $1,625,869 [CALCULATED] sits comfortably within the mid range — supportable, but vulnerable to a buyer who pushes the CapEx normalization argument hard.

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10. AUDIT TRAIL SUMMARY & BUYER DILIGENCE DEFENSE

Strength of the Normalization Schedule (as currently documented):

Pre-Listing Defense Checklist:

• ☐ Obtain 3 years of tax returns from CPA
• ☐ Obtain most-recent balance sheet
• ☐ Obtain AR aging, AP aging, inventory listing
• ☐ Obtain depreciation schedule
• ☐ Obtain fleet schedule (vehicles + age + ownership)
• ☐ Obtain employee roster with comp + family-member flag
• ☐ Document personal expenses run through business (line-item)
• ☐ Engage CPA to produce a defensible normalization workpaper
• ☐ Pre-model CapEx normalization argument with the seller

Buyer-Diligence Defense Posture:

The current normalization is supportable for an initial listing and LOI negotiation. It is NOT yet ready for a sophisticated buyer's QofE process. Expect a seasoned buyer's QofE team to challenge the depreciation/CapEx item (§7), probe for hidden personal expenses (§5), and require working-capital documentation (§6) before final purchase price is locked.

The recommended pre-listing investment: Engage the seller's CPA for a 10-15 hour engagement to produce a documented normalization workpaper. Cost: $2,000-$4,000. Value: typically supports $50,000-$150,000 of price defense by reducing buyer-side QofE adjustments.

Disclaimer

This Advanced Normalization Schedule is produced by an AI software system based on owner-reported data without source-document verification. It does not constitute a Quality of Earnings analysis, a certified valuation, or a substitute for engagement with a qualified transaction CPA. ClearValue Advisory · AI-Powered Business Analysis · bizvaluefree.com.

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