that's pretty common for the middle cylinder to be damaged on those. There was a service bulletin for the peehole to be re located to the top of the block to prevent that. Is that Done? try a different gauge, or pull the head off
Does that have a recoil starter on it. Those motors are pretty stout to pull. Check all your electrical connections. Make sure they are shiny clean the grounds on the block also.
buy a different motor. Converting it to a tiller is going to be expensive by itself. Then you have the lower unit problem which is a known issue on those motors.