SDE Calculator

Where to find each add-back on your tax return and books

Every figure in the calculator should come from the same year and the same source document. Most buyers start from the business tax return because it is the version of the numbers filed under penalty of perjury, then use the internal profit and loss statement and general ledger to explain individual lines. Where each figure lives depends on how the business is organized:

• Sole proprietors (Schedule C):net profit is on line 31, depreciation and Section 179 expense on line 13, and interest on line 16. There is no owner salary to add back, because owner draws are never deducted on Schedule C. The owner's self-employed health insurance and retirement contributions are claimed on the personal return, not the business schedule, so they are not in the business expenses either.
• S corporations (Form 1120-S):officer compensation is on line 7 and ordinary business income on line 21. The owner's wages are also on their W-2, and the employer share of payroll tax on those wages sits inside the taxes and licenses line. Health insurance for a shareholder who owns more than 2 percent is usually included in their W-2 wages, so check it is not counted twice.
• Partnerships and multi-member limited liability companies (Form 1065): a working partner is paid through guaranteed payments rather than wages. Add back the guaranteed payments of one working partner only.
• Amortizationof goodwill, a non-compete agreement, or startup costs is reported on Form 4562, Part VI, and flows into the "other deductions" line, which is why it is easy to miss.
• Owner perks and one-time expenses rarely have their own line. They sit inside vehicle, travel, meals, legal, and repairs, and you find them in the general ledger detail. Pull the transactions, mark the personal or one-off ones, and keep the receipts: an add-back you cannot document is an add-back a buyer will strike.

If you already know which items count, the glossary entry on what qualifies as an add-back gives the short version. The calculator above walks the same list in the order a buyer reviews it.

Worked example: a home-services company

The calculator opens pre-filled with a small home-services company that had 850,000 dollars of revenue last year and reported pre-tax net income of 92,000 dollars. The owner works in the business full time. Here is how the recast works, line by line:

The 14,500 dollarsof benefits is the employer payroll tax on the owner's wages plus the owner's health insurance and retirement contribution. The 9,800 dollarsof perks is the personal share of the owner's vehicle, phone, and a family trip booked as a conference. The 11,000 dollars one-time expense is a legal settlement with a former supplier, and the 4,000 dollars of non-recurring income is a gain on selling an old van, which is subtracted because a buyer will not get it again. Gross add-backs total 132,000 dollars, so seller's discretionary earnings come to 220,000 dollars, a SDE margin of 25.9 percent of revenue. That is more than double the reported profit, which is normal for an owner-operated business whose tax return was prepared to minimize tax rather than to show earning power.

Add-back mistakes buyers reject

A seller's add-back schedule is the most negotiated document in a small business sale. Each rejected line is multiplied by the price multiple, so a 10,000 dollar add-back that does not survive due diligence can cost far more than 10,000 dollars of price. These are the lines buyers and their accountants strike most often:

• Adding back more than one owner. SDE prices the business for a single owner-operator. A spouse, child, or second partner who works in the business has to be replaced, so their pay is a real cost at a market-rate wage. Only the excess above market rate, if any, can be added back.
• Recurring costs labelled as one-time.A roof repair is one-time; repairs every year are maintenance. If the same kind of "unusual" expense shows up in two of the last three years, a buyer will treat it as a normal operating cost.
• Perks the business actually needs. A truck that hauls equipment, a phone used to take bookings, or travel to meet customers would have to be paid by the new owner too. Only the personal portion is a discretionary expense.
• Unrecorded cash income. Sales that never reached the books cannot be added back. Lenders will not finance income the tax return does not show, and claiming it invites questions about every other figure.
• Ignoring capital expenditure. Depreciation is a legitimate add-back, but in an equipment-heavy business a buyer will still budget for replacing vans, tools, or machinery. Expect them to reduce the multiple, or deduct an annual capital expenditure allowance, if the equipment is near the end of its life.
• Below-market rent paid to the owner. If the owner also owns the building and charges the business little or no rent, a buyer will deduct market rent, which lowers SDE rather than raising it.

The same discipline of normalizing earnings for a buyer works in both directions: remove costs that will disappear, and add costs a new owner will have to start paying.

Documents buyers and lenders ask for

A credible SDE figure is one a third party can trace back to source documents. Before you list the business or talk to a buyer, assemble a recast financial statement that shows reported profit, every add-back, and the resulting SDE for each year, then gather the evidence behind it:

• Business tax returns, typically for the last three years, plus the year-to-date profit and loss statement and balance sheet.
• Payroll recordsshowing the owner's wages, the W-2, and the benefit and retirement plan statements that support the compensation add-back.
• General ledger detail for every account that contains a perk or one-time item, with receipts, invoices, or settlement paperwork for each line you add back.
• Bank statements that let a buyer tie deposits to reported revenue. This is the check that exposes unrecorded income claims.
• Loan and lease schedules that support the interest add-back and show which debts will be paid off at closing.

Lenders size an acquisition loan from these same figures. Once you know the SDE, the Small Business Administration loan calculator shows the annual payment a buyer would carry, and you can size a seller-financed note if a buyer needs part of the price paid over time. A lender wants the SDE left after a reasonable owner salary to cover that debt service comfortably.

SDE versus EBITDA: when each one is used

Both metrics start from the same net income and add back interest, depreciation, and amortization. The difference is the owner. SDEkeeps one owner's full compensation in the earnings, because the typical buyer of a small business is an individual who will do that job themselves. Adjusted EBITDA deducts a market-rate salary for whoever runs the company, because the typical buyer of a larger business is a company or investor who will hire management.

In the worked example, plain EBITDA is 118,700 dollars (net income plus interest, depreciation, and amortization). SDE is 220,000 dollars, which includes 84,500 dollars of owner salary, payroll taxes, and benefits on top of the perks and one-time items. If a general manager would cost an assumed 75,000 dollars a year fully loaded, adjusted EBITDA would be 145,000 dollars. Same business, three different earnings figures, which is why you must always pair a figure with the multiple that was built for it. An SDE multiple applied to EBITDA, or the reverse, misprices the business.

To see the EBITDA side of this example, run the same profit through our free EBITDA and margin calculator. For which metric a buyer will use for a business your size, read the detailed comparison of SDE and EBITDA.

From SDE to an asking price

SDE is the earnings figure, not the value. Buyers multiply it by an earnings multiple built for owner-operated businesses, and that multiple moves with the industry, the size of the business, how dependent it is on the owner, customer concentration, and how steady earnings have been. We do not quote a single generic range here because it would be wrong for most businesses. Instead, compare your figure against sale multiples drawn from closed transactions in your sector, or run a valuation that applies your industry's multiple to your SDE automatically. A three-year average or a weighted average of recent years is usually more persuasive than a single strong year, so it is worth recasting each of the last three tax returns with the calculator above.