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.

The normalization step:
Strip out recurring costs and expenses that depend on the current owner’s personal involvement. If the adjusted figure cannot cover debt service and a market-rate replacement manager, the headline SDE needs renegotiation before pricing — not after.

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.

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.

The normalization step:
Benchmark payroll against what independent market-rate hires would cost for each role. Apply those costs before pricing. If the SDE assumption depends on labor that would cost substantially more to replace, the multiple needs adjustment to reflect the real operating cost structure.

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.

The verification step:
Tie SDE to hard financial evidence — bank deposits, merchant processor statements, filed tax returns. Use our guide on verifying revenue to connect P&L figures to deposit patterns. Unexplained reconciliation gaps need resolution before any pricing confidence is warranted.

5. Run the DSCR Stress Test

The final screen before you trust any SDE number: can it survive underwriting?

Lenders don’t care about the seller’s adjusted SDE. They care about what remains after debt service, a market-rate salary for you, and a reasonable cash buffer.

The fast formula:

• Start with adjusted SDE (after steps 1–4)
• Subtract annual debt service (principal + interest on the acquisition loan)
• Subtract market-rate owner compensation
• The remainder is your DSCR cushion

If that remainder is negative — or DSCR falls below 1.25x — the deal doesn’t work at the asking price. Period.

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. See our 7 deal-killing red flags for more walk-away signals.

Bottom Line: SDE That Survives Lender Scrutiny

SDE that holds up to underwriting passes the same tests every time: revenue reconciles to deposits, add-backs are genuinely non-recurring, and normalized cash flow covers debt service at market-rate replacement costs.

• Add-backs should reflect what a new operator would actually not need to pay.
• Owner replacement cost belongs in the model, not the add-back column.
• Revenue verification against bank statements is standard lender practice — run it before the lender does.

Ready to start your own math? Download our SDE calculation worksheet.

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