Use SDE when the owner is still a material operator and discretionary earnings are under about $1 million. That is a rule of the road, not a statute.
What goes into SDE that a tax return hides?
Owner W-2 or draws. Personal insurance and vehicles. One-time legal bills that are actually one-time. Interest you will not keep. Depreciation that is not cash. Related-party rent above market if you can document the market. Add-backs is the list. Undocumented “owner perks” are not SDE. They are a conversation that dies in quality of earnings.
Census CBP 2023 counted 284,452 plants, 68.4% under twenty employees (Source: Census CBP). Most of those shops still have an owner on the first-piece inspection. SDE is their language.
| Line | Usually in SDE | Usually refused |
|---|---|---|
| Owner salary / draw | Added back | A cousin’s cash wage with no role |
| Interest | Added back | Ignoring the debt the buyer must refinance |
| Depreciation / amortization | Added back | Treating unfunded capex as a gift |
| Personal expenses | Added back if documented | A vibe about “how we live” |
| Replacement manager | Not subtracted in SDE | Calling the result EBITDA anyway |
BLS OEWS May 2025 median pay was $58,750 for machinists and $53,750 for welders (Source: BLS OEWS). Those figures belong in a replacement memo when you later move to EBITDA. They do not belong as a secret haircut inside an SDE teaser you never disclose.
Who actually underwrites SDE?
Individual buyers and many 7(a) lenders. Selling to an individual SBA buyer is the room. Standard 7(a) still sits in a $5 million box with a 10% injection (Source: SBA). The lender wants cash the owner can take, then a story about who runs the floor after close.
BizBuySell’s 2021–2025 manufacturing sold set cleared at a 2.75x median SDE multiple (Source: BizBuySell). That is the print you may put next to an SDE number. It is not a print you may put next to adjusted EBITDA.
Why mixing SDE and EBITDA invents a price
A $900k SDE shop that includes $220k of owner salary is not a $900k EBITDA company. Institutional buyers will subtract a replacement package first. If you already have a general manager in the number, you may be in EBITDA territory. Say so. Valuation still wants the size band. The FAQ index splits the nouns so one H1 cannot steal the other.
Stanford’s ~6.2x EBITDA study neighborhood is not an SDE file. Do not introduce those guests.
How should you document add-backs before the first tour?
One folder per item. Invoice, check, or payroll register. A sentence that says why it will not transfer. “Owner perks” as a single line is how the add-back dies. “Personal auto — see GEICO 2024 and 2025, not on the insurance schedule after close” is how it lives.
Related-party rent needs a lease and a market comp, not a vibe that the building is “worth more.” Interest needs the note you will not keep. Depreciation is easy. Unfunded capex is the trap — do not treat starved maintenance as a gift inside SDE. Buyers will subtract it later when they move to EBITDA, or they will walk.
If you are still the programmer, say so. SDE assumes an owner-operator. Hiding that you are also the night shift is how the individual buyer’s lender discovers key-person risk in week eight. The 2.75x print still attaches to SDE. It does not attach to a fiction about a manager who does not exist.
Keep a parallel page that shows what the number would be as adjusted EBITDA. You do not have to publish it. You do have to know it, because the first searcher will ask.
What should you bring if you want an SDE recast that survives the first serious buyer?
Three years of returns. Owner compensation detail. The add-back binder with invoices. Whether you are still the programmer. Whether a manager already exists. Whether the likely buyer is an individual or a searcher.
SDE is a kindness to the owner-operator file when it is used honestly. It is a trap when it is used to hide a missing manager. Individual buyers and 7(a) lenders speak this language because they are buying a job as well as a P&L. Searchers will translate it. Help them translate it. Do not make them guess.
If discretionary earnings are already above about $1 million and a manager exists, stop forcing SDE. You are in the other chair. Say so on the teaser so the first twenty tours are the right twenty tours. The owner fork is where the two bases stay separated.
Jason Taken is a business broker. He will help stage a recast. He will not sign a QoE. Document each add-back in its own folder. A single “owner perks” line is how the first serious buyer deletes the number.
SDE assumes an owner-operator. If a manager already exists, say so and move to the other chair.
Educational information only. Read the owner fork, then use the intro call.