RESTORATION · Q1 2026 · 33-item pre-LOI diligence checklist · 7 Critical · 15 High · 11 MediumMETHODOLOGY · Acquidex v1.0 · Anchored to AQX-IR-RST-2026Q1 · Sample window 2025-05 → 2026-04 (trailing 12 months)CRITICAL 01 · Restate trailing SDE on cash basis (account-by-account AR adjustment) · EARNINGS QUALITY pillarCRITICAL 02 · Verify TPA program registrations are in entity name (not owner personal) · TRANSFERABILITY pillarCRITICAL 03 · Audit IICRC certification matrix (WRT / ASD / AMRT / FSRT) by technician · TRANSFERABILITY pillarLIVE · Pre-LOI verifications a sophisticated buyer should clear before signing an LOIRESTORATION · Q1 2026 · 33-item pre-LOI diligence checklist · 7 Critical · 15 High · 11 MediumMETHODOLOGY · Acquidex v1.0 · Anchored to AQX-IR-RST-2026Q1 · Sample window 2025-05 → 2026-04 (trailing 12 months)CRITICAL 01 · Restate trailing SDE on cash basis (account-by-account AR adjustment) · EARNINGS QUALITY pillarCRITICAL 02 · Verify TPA program registrations are in entity name (not owner personal) · TRANSFERABILITY pillarCRITICAL 03 · Audit IICRC certification matrix (WRT / ASD / AMRT / FSRT) by technician · TRANSFERABILITY pillarLIVE · Pre-LOI verifications a sophisticated buyer should clear before signing an LOI
Q1 2026 Restoration Pre-LOI Diligence
The complete restoration pre-LOI diligence checklist.
Every Restoration 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 Restoration Atlas.
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.
01
Category 01 · 3 items
Financial normalization
Restate trailing SDE on cash basis (account-by-account AR adjustment)
Why:Revenue recognized before insurance settlement appeared in 61% of deals; SBA cash-basis underwriting drives 20–35% SDE adjustment. Lenders cannot bridge accrual-vs-cash gap — accrual SDE without restatement is the dominant Q1 2026 Fundability fall-through.
Check:Account-by-account AR aging analysis · trailing 24-month accrual revenue · cash collected by month · contested / carrier-pending claims excluded from cash basis · cash-basis SDE bridge memo.
critical
Earnings Quality
Normalize supplement revenue to trailing 3-year average
Why:Supplement revenue presented at peak-negotiation levels appeared in 34% of deals; normalization to 3-year average reduced presented SDE by 8–18%. Carrier appetite for supplement acceptance compresses with claim volume.
Add back owner-estimator at full Xactimate-certified PM replacement cost
Why:Owner-estimator normalization is a dominant Earnings Quality finding. Owners performing Xactimate estimating, TPA relationship management, and large-loss PM cannot be replaced at a $75K bookkeeper add-back. Replacement runs $85K–$150K loaded with TPA channel responsibility.
Verify TPA program registrations are in entity name (not owner personal)
Why:TPA registrations in owner personal name appeared in 43% of deals — non-transferable, post-close re-application timeline 60–180 days. Alacrity, Contractor Connection, Code Blue and major carrier preferred-vendor panels all require entity-level registration for transferability.
Check:TPA application forms (each network) showing registered entity · vendor approval letters · TPA contract assignments · trailing 12-month TPA revenue by network · re-application timeline if not entity-level.
critical
Transferability
Map customer / carrier concentration on TPA and direct-carrier channels
Why:TPA revenue typically 25–40% of gross; concentration on a single TPA or carrier creates DSCR stress-test risk. Channel concentration (Alacrity / Contractor Connection / Code Blue + State Farm / Allstate) requires concentration-loss DSCR modeling.
Check:Top 10 TPA + carrier sources by trailing-12-month revenue · master service agreement assignment provisions · re-bid history · DSCR stress-tested at 20% concentration loss.
Why:IICRC certification gaps appeared in 41% of deals. TPA networks increasingly require IICRC-certified staff above 75%; gaps create TPA renewal risk regardless of operational quality.
Check:IICRC certification per technician (WRT, ASD, AMRT, FSRT, OCT) · expiration and renewal dates · certification class · backup-credential candidates · TPA approved-vendor threshold per network.
critical
Transferability
04
Category 04 · 3 items
Technology & operations
Verify Xactimate seat licensing and estimator certification levels
Why:Xactimate (Verisk) is the dominant carrier-accepted pricing standard; seat licensing transfers must be verified. Estimator certification level (Level 1 / 2 / 3) directly affects supplement-acceptance rate and TPA standing.
Check:Xactimate seat licenses per estimator · certification level (1 / 2 / 3) · subscription transfer terms · trailing supplement-acceptance rate by estimator · Xactanalysis usage.
high
Transferability
Audit job management software (DASH, Encircle, Restoration Manager) and data ownership
Why:Job management software contracts often have data-export and termination terms that constrain post-close transitions; loss of historical job documentation and Xactimate integration is an Earnings Quality continuity risk.
Check:Software contract terms · data export rights · monthly active seat count · Xactimate / Xactanalysis integration · trailing 12-month uptime / outage log · API access.
medium
Transferability
Map online review velocity and reputation footprint
Why:Servpro, PuroClean, Paul Davis, Rainbow International, Restoration 1 franchise agreements have specific assignment / change-of-control provisions; royalty obligations (6–12% of gross) and territory rights affect SDE structure.
Confirm state mold remediation licensing (FL / TX / NY / LA)
Why:Florida (DBPR), Texas (TDLR), New York (DOL), and Louisiana (LSLBC) require separate mold remediation licensing distinct from general contractor licensing; missing or expired licenses void mold-scope revenue.
Check:State mold remediation license per entity · mold assessor / remediator separation (where required) · license expiration and renewal · multi-state coverage if applicable · backup licensed personnel.
high
Fundability
Verify EPA NESHAP Asbestos and EPA RRP credentialing
Why:EPA NESHAP Asbestos (40 CFR Part 61 Subpart M) and EPA RRP Lead-based Paint Rule apply to restoration work involving pre-1980 / pre-1978 construction; missing certifications void scope and trigger penalty exposure.
Confirm OSHA HAZWOPER training for category 3 water and biohazard scope
Why:OSHA HAZWOPER (29 CFR 1910.120) applies to category 3 water (sewage) restoration and biohazard remediation; missing training creates strict-liability exposure and TPA program disqualification.
Check:HAZWOPER training certificates per technician (24-hour, 40-hour as applicable) · refresher training cadence · category 3 water work logs · biohazard scope tracking.
high
Fundability
Audit equipment and chemical inventory storage compliance
Why:Antimicrobial chemicals, asbestos / lead waste, and biohazard materials require strict storage / disposal compliance; mis-stored or expired chemicals are regulatory findings.
Check:Chemical inventory list with expiration · storage area compliance · SDS file · asbestos / lead / biohazard waste manifest · disposal records.
medium
Fundability
07
Category 07 · 1 item
Working capital & balance sheet
Audit AR aging by claim status (paid / pending / contested)
Why:AR days above 90 in restoration carry contested-claim risk; carrier-pending and contested claims should be excluded from cash-basis SDE entirely.
Check:AR aging by carrier 0–30 / 31–60 / 61–90 / 90+ · per-claim status (paid / pending / contested) · trailing 24-month bad-debt write-offs · carrier-by-carrier AR concentration.
Why:Equipment fleet (dehumidifiers, air movers, HEPA scrubbers, extraction units, antimicrobial sprayers) is capital-intensive ($250K–$600K minimum). Equipment age and condition drive forward capex; under-equipped operations carry TPA program risk.
Check:Equipment list with model, age, condition · dehumidifier / air mover ratio per loss-volume · HEPA scrubber inventory · trailing 36-month equipment repair spend · replacement schedule.
high
Earnings Quality
09
Category 09 · 1 item
Labor & technical capacity
Reconcile 1099 contractor labor against subcontractor exposure
Why:Heavy 1099 use in reconstruction scope can trigger ABC-test or worker-classification audits (esp. CA AB5, NJ, MA) and inflates apparent labor margin while hiding employer tax exposure.
Why:X-Mod above 1.0 signals injury frequency above industry average; restoration carries class-code risk on lifting, water exposure, fire-debris handling, and biohazard scope.
Check:NCCI X-Mod worksheet · trailing 5-year claims · OSHA 300 log · restoration-specific class code · safety program documentation · biohazard / asbestos / lead specific endorsements.
medium
Transferability
Confirm GL, professional liability, and pollution coverage
Why:Standard GL alone does not cover pollution liability (mold remediation, asbestos abatement, biohazard); under-insurance flags forward premium increase or buyer-side gap coverage.
Check:Certificates of Insurance · Contractors Pollution Liability (CPL) limits · mold / asbestos / lead specific endorsements · umbrella policy · loss runs 5 yr.
medium
Fundability
11
Category 11 · 2 items
Real estate & lease
Read the shop and warehouse lease for change-of-control
Why:Shop, warehouse, and equipment storage 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 · equipment storage compliance.
medium
Transferability
Phase I environmental on owned or controlled real estate
Why:Restoration operations historically used solvents, antimicrobial chemicals, and stored asbestos / lead waste; environmental finding can stop SBA financing on real-estate-included deals.
Check:Phase I ESA report (current within 12 months) · UST / AST records · asbestos / lead disposal documentation · biohazard waste handling records · spill or release history.
medium
Fundability
12
Category 12 · 1 item
Compliance & legal
Search lien filings, UCC-1s, and litigation history
Why:Mechanic's liens on property work, customer-claim disputes (mold-recurrence, drying-failure), and 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 · customer-claim and mold-recurrence history.
medium
Fundability
13
Category 13 · 1 item
Tax & entity
Review state sales tax nexus and restoration-service taxability
Why:Restoration sales tax rules vary widely (TX taxes most labor on real-property repair; FL exempts certain insurance-claim work; CA partial); errors compound at 4–8.25% of revenue.
Check:Sales tax returns 3 yr per state · taxability matrix by state for mitigation / reconstruction / mold · audit notices or assessments · insurance-claim-specific carve-outs.
medium
Fundability
14
Category 14 · 10 items
Japan · Cross-border (J-GAAP & prefectural)
Verify Construction Business Act licensure (建設業許可) — 建築工事業 / 管工事業 by prefecture
Why:Japanese restoration work falls under 建築工事業 (building construction) and 管工事業 (piping) categories under the Construction Business Act; entity-level prefectural license required. Operating outside the licensed scope or prefecture is a strict-liability finding under 建設業法.
Check:建設業許可 certificate by category (建築工事業 / 管工事業) · governor- vs minister-issued classification · 一般建設業 vs 特定建設業 · 専任技術者 (technical engineer) on file · prefectural inspection history.
Why:JP renovation / restoration work in pre-2006 buildings requires 建築物石綿含有建材調査者 certification under MHLW; missing certification voids commercial scope and triggers 労働安全衛生法 penalty exposure.
Check:建築物石綿含有建材調査者 certification per technician · 石綿作業主任者 (Asbestos Work Supervisor) appointment · pre-2006 work scope tracking · MHLW reporting status · disposal documentation.
critical
Fundability
Re-cut financials under J-GAAP goodwill amortization
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.
critical
Earnings Quality
Verify 損害保険会社 settlement structure and direct-carrier relationships
Why:JP non-life carriers (Tokio Marine, Sompo, MS&AD) settle directly with insureds rather than via TPA networks; restoration scope is contractor-and-insured negotiation. Loss of direct-carrier relationship can compress route value materially.
Check:Carrier-by-carrier relationship history · 損害保険査定 (loss adjustment) protocol · scope-and-pricing negotiation track record · written carrier consent on assignment · trailing-period carrier mix.
high
Pricing
Verify consumption tax (消費税) treatment on insurance-claim revenue
Why:JP consumption tax sits at 10% standard rate; insurance-claim restoration work is typically standard-rate but partial-period revenue and carrier-pending claims create reconciliation gaps.
Pressure-test the long-term employment cost structure
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 and social insurance obligations are often understated on US-style accounts.
Check:退職金規程 · 退職給付債務 calculation · 社会保険・労働保険 contribution rate per employee · 専任技術者 retention agreement · 有期 vs 無期 employee mix.
high
Transferability
Map the relationship-banking structure and CoC consent rights
Why:JP SMB acquisitions typically rely on relationship-based regional bank financing (地銀 / 信金); existing main-bank relationships often hold change-of-control consent rights via loan covenant.
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.
high
Fundability
Plan APPI-compliant customer-data transfer for insurance-claim databases
Why:JP APPI (個人情報保護法) requires customers be notified of personal data transfer on M&A; restoration-job databases contain substantial PII (insurance claim numbers, property loss details, photos) that triggers PPC obligations.
Check:Pre-close APPI privacy-policy review · sample customer-notification letter · post-close notification campaign budget · PPC reporting protocol · carrier consent on insured-data transfer.
high
Transferability
Inspect 商業登記 (commercial registry) and 印鑑証明 (seal certificate)
Why:JP corporate transactions require fresh 履歴事項全部証明書 and 印鑑証明書; outstanding director changes or unfiled capital actions are blocking findings at signing.
Check:法人登記簿謄本 issued within 3 months · representative director seal certificate · outstanding capital subscription receivables · prior M&A or capital actions.
Why:JP restoration work is typically subcontracted by 建設業 general contractors; 元請 (general contractor) relationship transferability is the dominant cross-border Pricing pillar question. Loss of GC relationship can compress route value by 30–50%.
Check:GC relationship list · 元請 contract structure · master subcontract agreement assignment provisions · written GC consent to assignment · trailing-period GC concentration.
