Well, you may want to increase the valve lash first. 1/4" PTDC .003 int .005 exh. But then, pull the flywheel, replace the sheared key and resecure the flywheel to 100 ft #s. you want to know that the coil is not installed flipped either. they are marked on the lamination. Resetting the governor is simple should you need to.

The shear key is good, I replaced it during the rebuild and the coil was never removed, I measured the gap at .010. I've tried not to mess with what was working (governor and carb). I'll reset the valve lash to your instructions Tomplum, Thank you. My thinking is to confirm the compression even though I think it's good and do a real leak down test. I'm going to pick up a compression tester and see what I've got. Otherwise, what else could it be?

Since the compression release is in effect (with proper valve adjustment) your readings are compromised.

***The shear key is good, I replaced it during the rebuild"***
Unless you used the correct installation procedure and torqued the flywheel retainer to 100 Lb Ft, your above statement is only a presumption.
There is only 1 correct way to install that key.
Crankshaft and flywheel taper surfaces must be clean and dry....free of any oil, grease or dirt.
Lower the flywheel onto the crankshaft and THEN insert the clean dry key into the aligned keyways.
Torque the flywheel retainer to 100 Lb Ft.
Any deviation from the correct method might result in a sheared key upon the first activation of the starter.
A sheared key will still allow a spark to be generated.....it just will not be at the right time.

Agree with mownie. I would remove the cooling shroud, flywheel screen, flywheel bolt & washer and look down the keyways with a pen light.

Walt Conner

I never thought I'd be so happy to say I was wrong but at least I found the problem. You guys were exactly correct. The key was sheared in half. I have to order one but I'll put it in per above directions and let you know from there. Thanks for the advice.