SDE Add-Backs: What Your Business Really Earns (and What a Buyer Will Believe)

When an owner asks me what their business is worth, the first number I look at isn't the bottom line on their tax return. It's something called Seller's Discretionary Earnings, or SDE. For most owner-operated businesses in Sarasota, Charlotte, Manatee and Lee counties, SDE is the starting point for valuation, and the add-backs that go into it can make a real difference to the price.

They can also sink a deal if they aren't supported. Here's how I explain it to the business owners I work with.

What SDE is

SDE is the total financial benefit one full-time owner gets from the business in a year. You start with net profit before taxes, then add back items that a new owner wouldn't necessarily have, or that reflect your personal choices rather than the cost of running the business.

The usual starting add-backs are:

• The owner's salary or draws (for one working owner)
• Interest on business loans, since a buyer will finance the purchase their own way
• Depreciation and amortization, which are accounting entries rather than cash going out the door that year

Then come the discretionary and one-time items, and that's where most of the conversation happens.

Add-backs that usually hold up

These are the ones I see buyers and lenders accept most often, as long as there's paperwork behind them:

• Personal expenses run through the business. A family cell phone plan, a personal vehicle, a health insurance policy that covers your spouse who doesn't work in the business.
• True one-time costs. A lawsuit that's settled, a website rebuild, a one-off equipment repair after a storm, or the cost of moving locations.
• Non-recurring professional fees, such as legal work on something unrelated to day-to-day operations.
• Above-market rent paid to yourself, if you own the building and charge the business more than a market rate. (The reverse matters too: if you charge yourself below market, a buyer will adjust the earnings down.)

Add-backs that raise eyebrows

This is where I spend the most time with sellers. Buyers, and especially SBA lenders, will push back on:

• "Cash we didn't report." If it isn't on the tax return, it doesn't count. I won't present it, and a lender won't finance it.
• Family members on payroll who actually work. If your son runs a crew three days a week, someone has to be paid to do that after you leave.
• Ongoing costs called "one-time." If you've replaced a mower or a pressure washing rig every year for four years, that's a cost of doing business, not a one-time expense.
• A second owner's salary. SDE covers one working owner. If two partners both work full time, a buyer will need to replace one of them.
• Deferred maintenance you've skipped. If trucks and equipment are worn out, a buyer will price that in whether or not you add anything back.

Why documentation matters more than the number

A buyer doesn't just look at your SDE. They try to rebuild it from your tax returns, bank statements and general ledger. If your add-backs tie cleanly to those records, trust goes up and so does the chance the deal closes on the terms you agreed to.

If they don't tie out, the deal usually doesn't die all at once. It gets renegotiated during due diligence, after you've already mentally spent the money. I've seen that happen, and it's the reason I'd rather be conservative up front.

What I ask sellers to pull together:

1. Three years of business tax returns, plus year-to-date financials
2. Matching bank statements
3. A list of each proposed add-back with the amount, the year, and where it appears in the books
4. Receipts or invoices for anything larger or unusual

If you're thinking about selling in the next year or two, start separating personal and business spending now. Every clean month makes the next buyer's job easier.

What SDE means for price

Small businesses are often priced as a multiple of SDE. The multiple depends on things like how dependent the business is on you, recurring revenue (route-based landscaping and cleaning contracts help here), customer concentration, equipment condition, and how long the earnings have been stable. That's a separate article. The point here is simpler: an add-back that holds up gets multiplied, and so does one that falls apart.

A note: this is general education, not tax or accounting advice. Your CPA should confirm how items are treated on your returns.

Want to know where you stand?

I'll recast your financials to SDE, walk you through which add-backs I'd expect a buyer and a lender to accept, and give you an honest range of value. It's confidential and there's no cost to have the conversation.

Call me at 941-315-5019, or request a free, confidential valuation.

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