Seller inflated COGS

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February 01, 2026

by a searcher from University of Illinois at Urbana-Champaign in San Diego, CA, USA

I am looking into an HVAC company which does 80% commercial contracts vs 20% residential. The seller inflated the COGS in the past few years and they used 50% adjusted COGS to calculate SDE for valuation. They have a few big commercial contracts starting late 2025 or early 2026 and have some decent annual maintenance jobs. Is there any red flags on this?
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Reply by a searcher
from Dartmouth College in Garden Grove, CA, USA
Inflated COGS by itself isn’t necessarily a red flag, but it does mean you need to really understand what’s actually changing post-close. In HVAC, the key question is whether those future contracts actually earn the margins the adjusted numbers assume, especially with a heavy commercial mix. I’d want to get comfortable there before leaning on the SDE. Happy to take a quick second look at the financials if that’s useful.
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Reply by a professional
from Northwestern University in Chicago, IL, USA
I’m happy to offer some insights and chat more. You can reach me at redacted
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