Q1 2026 Electrical Pre-LOI Diligence
Every Electrical acquisition verification a sophisticated buyer should clear before signing a letter of intent — grouped by category, tagged by pillar and severity, anchored to the Q1 2026 Electrical Atlas.
42
Total items
9
Critical · pre-LOI
15
High · post-LOI risk
18
Medium · diligence period
Severity legend
critical Will cause SBA fall-through or a deal break if missed. Verify before LOI.
high Post-LOI repricing risk. Verify in the diligence period or accept the haircut.
medium Diligence-period verification. Will not kill the deal but compounds working-capital and post-close risk.
Category 01 · 2 items
Why:Sole-owner master license is the dominant Q1 SBA fall-through pattern; SBA underwriters are treating it as failed license continuity before reaching DSCR.
Check:State licensing portal lookup · payroll register showing the master as a W-2 employee · entity-named licenses on file · documented permit-pull succession plan.
Fundability
Why:Multi-state operations (e.g. Twin Cities metro covering MN/WI; Cincinnati covering OH/KY/IN) require separate state masters; coverage gaps are an immediate Transferability finding.
Check:Service-area zip-code map vs state license coverage · master license expiration dates · CE hours documented per state · reciprocity agreements relied on.
Transferability
Category 02 · 3 items
Why:COMEX copper traded at $5.44/lb in late March 2026, 83.7% above the Feb 2020 baseline. Section 232 tariff effective April 2, 2026 adds further pass-through gap. Trailing margins blended across the run-up overstate forward economics by ~12% in wire-and-conduit-heavy work.
Check:Wire-and-conduit cost per dollar of revenue trend · fixed-price contract list with material escalation clauses · supplier-invoice copper unit cost by month · post-tariff cost basis memo.
Earnings Quality
Why:Project backlog was partially recognized as trailing SDE in 52% of deals reviewed. Lenders require cash-basis SDE; percentage-completion accruals can overstate the trailing period by 15–30% in project-heavy electrical businesses.
Check:WIP schedule · revenue recognition policy memo · cash-basis vs accrual SDE bridge · backlog-to-completed-job realization rate.
Earnings Quality
Why:Owner-electrician normalization is the top SBA fall-through cause this quarter. Owners performing master-level field work, project management, and permit pulling cannot be replaced at a $65K bookkeeper add-back. Replacement cost runs $90K–$140K fully loaded.
Check:Owner time-allocation interview · master-level market wage in metro · whether a separate W-2 master exists · project-management hours separate from field hours.
Earnings Quality
Category 03 · 4 items
Why:Compliance gaps on installed-base commercial work appeared in 64% of commercial-weighted deals reviewed. Forward retrofit liability flows to capex reserve before LOI; state adoption cycles 12–24 months following NEC 2026 publication.
Check:Installed-base commercial customer list · arc-flash study completion status · labeling sample audit · state NEC 2026 adoption status · short-circuit study and incident-energy calc files.
Transferability
Why:OSHA Subpart S is a leading citation category in electrical work. Energized-work permitting, lockout-tagout, and PPE program documentation are standard SBA diligence items.
Check:Energized electrical work permit log · LOTO program · arc-flash PPE inventory · OSHA 300 log 5 yr · citation history.
Fundability
Why:Federally funded jobs (NEVI EV charging, school-district work, military housing, CHIPS facilities) trigger prevailing-wage and Buy America requirements; non-compliance is a payback liability.
Check:Federally funded contract list · certified payroll records · Buy America compliance documentation · DOL audit history.
Fundability
Why:Mechanic's liens filed against the entity (or filed by the entity) signal commercial collection issues; unreleased UCC-1s on equipment block clean title at close.
Check:Secretary of State UCC-1 search · county-level mechanic's liens · PACER litigation search · state court docket search.
Fundability
Category 04 · 2 items
Why:Recurring revenue share is the dominant top-of-band Pricing determinant; presented share that does not reconcile to bank deposit categorization is a finding.
Check:Trailing 12-month bank deposit categorization · ACH file from agreement billing system · reconciliation memo to General Ledger · agreement count by start date.
Pricing
Why:Headline retention rates can mask churn timing; lenders increasingly require cohort data not blended averages.
Check:Quarterly cohort retention table for trailing 24 months · agreement start dates · ServiceTitan or Housecall Pro export of contract status by month.
Pricing
Category 05 · 3 items
Why:EV charging and data center pipeline was used to inflate implied forward SDE in 28% of deals reviewed. Forward pipeline is not trailing SDE — a $3M EV backlog is a forward opportunity, not a basis for multiple inflation.
Check:Pipeline schedule with PO numbers and customer credit ratings · pipeline conversion rate prior 24 months · cash-basis trailing SDE without pipeline contribution · resource availability against pipeline.
Pricing
Why:Fixed-price contracts written 2023–2024 absorbed copper input run-up unevenly; contracts without material escalation clauses are flowing direct margin loss to the trailing period.
Check:Active fixed-price contract list · material escalation clause language · pass-through trigger thresholds · trailing-12-month margin impact memo · forward exposure on remaining backlog.
Earnings Quality
Why:Multi-month backlog presented as forward revenue must be tested against signed POs and customer creditworthiness; verbal commitments do not survive due diligence.
Check:Backlog schedule with PO numbers · customer credit ratings · scheduled vs realized completion 24 mo · cancellation history.
Pricing
Category 06 · 4 items
Why:IBEW–NECA 2024–2028 inside agreements lock 3–5%/yr wage escalation through 2028 in signatory shops. Forward DSCR sized on historical wage curves overstates coverage.
Check:IBEW collective bargaining agreement · current wage tier and step · scheduled escalator dates 2026–2028 · merit-shop election eligibility if currently signatory.
Fundability
Why:Documented apprenticeship pipeline is the highest-ROI Transferability signal in the structurally labor-constrained trade; absence is a forward labor-replacement cost item.
Check:DOL Registered Apprenticeship status (RAPIDS) · IBEW JATC participation if signatory · ABC apprenticeship if merit-shop · apprentice register and curriculum hours per week.
Transferability
Why:Heavy 1099 use can trigger ABC-test or worker-classification audits (esp. CA AB5, NJ, MA) and inflates apparent labor margin while hiding employer tax exposure.
Check:1099-NEC totals 3 yr · per-contractor revenue dependence · scope-of-work agreements · workers comp coverage on 1099 entities.
Earnings Quality
Why:Specialty scope (solar tie-in, EV charging) often requires NABCEP (solar) or EVITP (EV charging) credentials at the technician level; certification gap is a forward labor-cost item for the specialty pipeline.
Check:NABCEP / EVITP cert ID per technician · expiration dates · scope coverage vs trailing solar/EV revenue · forward training budget.
Transferability
Category 07 · 1 item
Why:Distributor credit lines (Graybar, Rexel, CED, Sonepar) are personally guaranteed by the seller in many SMB deals; loss of terms post-close compresses working capital.
Check:Supplier statements with payment terms and credit limits · personal guarantee disclosures · written confirmation of post-close terms portability · annual rebate accrual.
Transferability
Category 08 · 2 items
Why:Service-van replacement at 8+ years requires $35K–$55K each; under-equipped vans (no EVSE tools, no torque-meter calibration, no GPS) carry forward capex and operational risk.
Check:Vehicle list with VIN, year, mileage, lien status · EVSE tool kit per van · 240V tooling certification · GPS subscription · trailing 36-month repair spend per vehicle.
Earnings Quality
Why:Megohmmeters, ground-resistance testers, thermal imagers, and torque drivers require periodic calibration; missing tooling is forward capex and missing calibration is a code-compliance finding.
Check:Tool list per van · calibration certificates · in-shop test equipment · arc-flash PPE inventory and inspection log.
Transferability
Category 09 · 1 item
Why:Commercial accounts above 15% of revenue, or any single customer above 10%, materially alter Earnings Quality and Pricing; mix shifts within the trailing period must be normalized.
Check:Top 20 customers by trailing-12-month revenue · residential vs commercial split · service vs project vs maintenance mix · multi-year trend.
Earnings Quality
Category 10 · 2 items
Why:Shop, yard, and signage lease is the operational anchor; landlord assignment provisions and below-market rent (if landlord = seller) are common findings.
Check:Lease assignment / change-of-control clause · related-party indicator if landlord shares ownership · market rent comp · remaining term and option rights.
Transferability
Why:Electrical operations historically used PCB-containing transformers, lead-acid batteries, and solvent storage; environmental finding can stop SBA financing on real-estate-included deals.
Check:Phase I ESA report (current within 12 months) · UST / AST records · spill or release history · PCB transformer inventory if any.
Fundability
Category 11 · 3 items
Why:States that license electrical contractors typically require a surety bond ($5K–$25K); commercial work over a threshold often requires per-project performance bonds.
Check:Active state surety bond · bonding agency relationship · single-project and aggregate capacity · commercial backlog requiring bonds.
Fundability
Why:Standard GL alone does not cover arc-flash incident liability or new-construction wrap-up requirements; under-insurance flags forward premium increase or buyer-side gap coverage.
Check:Certificates of Insurance · contractors pollution liability rider if applicable · umbrella policy · loss runs 5 yr · electrical-specific endorsements.
Fundability
Why:X-Mod above 1.0 signals injury frequency above industry average and predicts forward premium; modifiers are sticky for 3 years post-close. Electrical work carries class-code risk on arc-flash and electrocution exposure.
Check:NCCI X-Mod worksheet · trailing 5-year claims · OSHA 300 log · electrical-specific class code (5190) · safety program documentation.
Transferability
Category 12 · 1 item
Why:Commercial-heavy operators carry 60–90 day AR; underestimating collectibility overstates working-capital target at close.
Check:AR aging by customer 0–30 / 31–60 / 61–90 / 90+ · trailing 24-month bad-debt write-offs · concentration risk per customer above 10%.
Earnings Quality
Category 13 · 3 items
Why:ServiceTitan, Housecall Pro, Procore (project) contracts often have data-export and termination terms that constrain post-close transitions; loss of historical service history is an Earnings Quality continuity risk.
Check:FSM contract terms · data export rights · monthly active seat count · trailing 12-month uptime / outage log · API access.
Transferability
Why:Callback rate above 8% on installs or 6% on service signals tech-quality issues that materialize as labor cost and reputation drag post-close.
Check:FSM callback report · same-job-revisit rate · trailing 12-month warranty labor cost · electrician-by-electrician callback breakdown.
Transferability
Why:Google review velocity below 1 per month per metro is a demand-generation finding; sudden negative-review clusters predict commercial fall-out.
Check:Google Business Profile review trend · BBB complaints and resolution · trailing-24-month star-rating trajectory · response rate.
Pricing
Category 14 · 1 item
Why:Electrical sales tax rules vary widely (TX taxes labor on real-property repair; FL exempts most labor; CA partial); errors compound at 4–8.25% of revenue and SBA underwriting flags large unrecorded liability.
Check:Sales tax returns 3 yr per state · taxability matrix by state for labor / parts / agreement · audit notices or assessments.
Fundability
Category 15 · 10 items
Why:Japanese electrical contractors require a 電気工事業 license issued either by the prefectural governor (single-prefecture) or by MLIT (multi-prefecture). Operating outside the licensed scope or prefecture is a strict-liability finding under the Construction Business Act (建設業法).
Check:電気工事業 license certificate · governor- vs minister-issued classification · 一般建設業 vs 特定建設業 (specified, required for subcontracts ≥ ¥45M) · expiration and renewal status · technical engineer (専任技術者) on file.
Fundability
Why:JP electrical work requires 第一種 (full-scope) or 第二種 (≤600V general residential) certification per the Electrician Act (電気工事士法). 200V residential and panel work requires 第二種 minimum; commercial / high-voltage requires 第一種. Missing or expired certification voids work scope and triggers METI penalty exposure.
Check:電気工事士 certification per tech (Type 1 / Type 2) · expiration and renewal dates · scope of past work requiring credentialing · 主任電気工事士 (chief electrician) appointment letter.
Fundability
Why:In addition to the per-tech 電気工事士 certification, the entity must hold 電気工事業登録 with each prefecture in which it operates. Registration is non-portable and must be re-filed at change of ownership — typically a 30–60 day administrative window during which work scope is constrained.
Check:電気工事業登録 certificate per prefecture · 主任電気工事士 appointment · re-registration timeline at signing · provisional-status rules during prefectural review.
Transferability
Why:J-GAAP requires goodwill amortization over up to 20 years (typically 5–10), unlike US GAAP impairment-only treatment. Trailing earnings presented under one regime systematically misstate the other; this is the single largest source of cross-border valuation error.
Check:Audited J-GAAP financial statements (損益計算書 P/L, 貸借対照表 B/S) · goodwill schedule with amortization period · accountant-prepared US-GAAP bridging memo · differences in revenue recognition for installation contracts.
Earnings Quality
Why:JP consumption tax sits at 10% standard / 8% reduced rate; electrical installation and maintenance are typically standard-rate but partial-period revenue and deferred-installation deposits create reconciliation gaps that compound at 10% of revenue.
Check:消費税申告書 (consumption tax returns) 3 yr · installation deposit liability schedule · invoice-system (インボイス制度) qualified invoice issuer registration number · 簡易課税 vs 本則課税 election.
Fundability
Why:Japan's 終身雇用 (lifetime employment) convention and Article 16 of the Labor Contract Act make termination far harder than at-will US employment. Severance reserves, social insurance employer contributions (社会保険料 ~15% of wages), and statutory retirement pay obligations are often understated on US-style management accounts.
Check:退職金規程 (retirement allowance rule) · 退職給付債務 (retirement benefit obligation) calculation · 社会保険・労働保険 contribution rate per employee · 有期 (fixed-term) vs 無期 (indefinite) employee mix.
Transferability
Why:JP SMB acquisitions typically rely on relationship-based regional bank financing (地銀 / 信金) rather than a national SBA-equivalent. Existing main-bank relationships (メインバンク) often hold change-of-control consent rights via loan covenant; loss of the relationship can compress working capital independent of credit metrics.
Check:Main-bank loan agreements with CoC clauses · personal guarantee (個人保証) by selling shareholder · relationship history with regional bank · 信用保証協会 coverage · post-close lender continuation letter.
Fundability
Why:Installations in commercial buildings require 建築設備検査 (Building Equipment Inspection) reports filed with the local government every 1–3 years; older installs often predate current code, creating retrofit liability that travels with the customer relationship.
Check:建築設備検査報告書 filings for the trailing 5 years · panel and feeder code-grandfathering memos for pre-2003 installations · third-party inspector reports.
Transferability
Why:JP corporate transactions require fresh 履歴事項全部証明書 (commercial register full extract) and 印鑑証明書 (registered seal certificate); outstanding director changes or unfiled capital actions are blocking findings at signing.
Check:法人登記簿謄本 (履歴事項全部証明書) issued within 3 months · representative director seal certificate · outstanding capital subscription receivables · prior M&A or capital actions on the registry.
Fundability
Why:Japan's Act on the Protection of Personal Information (個人情報保護法 / APPI) requires customers be notified of any transfer of their personal data on M&A and granted opt-out rights; failure invites Personal Information Protection Commission (PPC) scrutiny and customer complaints.
Check:Pre-close APPI privacy-policy review · sample customer-notification letter (email + mail) · post-close notification campaign budget (¥2–5M per 10K customers) · PPC reporting protocol if material breach.
Transferability
