How to Spot Fake SDE in 5 Minutes

1. Follow the Add-Back Trail

Add-backs are where 90% of SDE fiction lives.
A seller’s “$400K SDE” often looks like this:

• $120K “owner salary add-back” because they worked 80 hours a week
• $60K in “one-time” costs that mysteriously show up every year
• $30K in personal expenses sprinkled through COGS

Example:
A café claims $350K SDE. The owner works 70 hours/week, pays themselves nothing, and runs their car, health insurance, and family phone plans through the business.
Once those “add-backs” are ignored and the owner is replaced, real SDE drops to $160K.

Your move:

• Strip out anything that’s personal, recurring, or relies on one exhausted human.
• If the deal only works with the fairy dust, it’s not a deal.

2. Put a Real Salary on the Owner

If the seller wears five hats, those hats have market rates.
A real business can afford to replace the owner. A fake one can’t.

Example:
A plumbing company claims $500K SDE. The owner runs sales, dispatch, and field work.

• GM replacement: $120K
• Dispatcher: $60K
• Technician: $90K

Actual SDE after replacing the owner? Around $230K.

If replacing the owner breaks the business, there is no business.

Your move:
Back out the cost of real people doing real jobs.
If the “profit” vanishes, congratulations — you just spotted fake SDE.

3. Payroll vs. Add-Back Mismatch

A quick sniff test: check payroll.
If payroll on the P&L doesn’t match the roles implied in operations, something’s off.

Example:
A marketing agency claims $400K SDE but shows only $90K payroll for six “employees.” In reality, that “team” is the owner plus two unpaid interns. Real payroll would be closer to $250K. Poof — margin gone.

Your move:

• Benchmark payroll for the industry and location.
• Call BS on “everyone’s family working for free.”
• Adjust SDE downward before you get hypnotized by the asking price.

4. Reconcile to the Bank, Not the Broker

The spreadsheet isn’t the truth. The bank account is.

If the claimed SDE doesn’t align with:

• Bank deposits
• Tax returns
• Merchant processor statements

…you’re looking at a story, not a business.

Example:
A seller claims $900K revenue and $300K SDE. But the bank statements only show $600K in deposits.
Either $300K is cash under the table (good luck proving it to a lender) or it doesn’t exist.
Either way, that number isn’t real.

Your move:

• Verify SDE against hard financial evidence.
• If it doesn’t reconcile, walk.

5. Stress Test With DSCR Math

Even if the number looks good on paper, it has to survive a DSCR stress test — basically:
“Can this business actually pay the bills and you?”

Quick math:

• Claimed SDE: $300K
• Payroll for real roles: -$100K
• SBA loan payment: -$120K
• Working capital buffer: -$20K
  Net: $60K

That’s not “$300K profit.” That’s a stressed-out buyer with no cushion.

If the SDE doesn’t survive DSCR math, it’s fake.

6. Watch for “One-Time” Costs That Aren’t

“One-time” is the most abused phrase in small business deals.
Marketing overhaul, equipment repair, “family medical emergency” — if it happens every year, it’s not one-time. It’s overhead.

Example:
A gym owner adds back $45K in “one-time equipment repairs.”
Three years of statements show the same line item every year. Surprise: that’s just how much it costs to keep the treadmills alive.

Your move:

• Look at a 3-year trend line, not a broker’s pitch deck.
• If it repeats, it stays in the expense column.

Bottom Line: Real Businesses Don’t Need Fairy Dust

A real SDE holds up to math, not just marketing.
If the number depends on owner heroics, unpaid family labor, or “trust me bro” accounting — it’s not profit. It’s a mirage.

• Add-backs should clarify, not inflate.
• Owner salary isn’t optional.
• Bank statements don’t lie.

Disclaimer