SDE Schedule

Seller's discretionary earnings start from a business's profit and add back what a new owner would not pay: the current owner's salary and benefits, interest, depreciation, and expenses that were discretionary or will not recur. Doing the sum is easy. Getting a buyer to agree to it is the hard part, because every add-back raises the number the buyer will multiply, and so every add-back is an item the buyer has a reason to challenge. An owner who arrives with a long list of things they remember spending will watch most of it disappear in the first meeting.

SDE Schedule is the driver that makes the list survive. The schedule is built from the ledger, every item is tied to a document, add-backs other than the owner's own pay are kept to a modest share of the total, and an outsider walks the schedule before anyone quotes the number. What was the owner's claim becomes a figure a broker and a lender can defend.

A schedule built from the ledger

Every add-back on the schedule, of any size, has to be tied to a ledger entry with a source document, and the add-backs other than the owner's compensation should come to no more than a modest share of SDE.

The schedule starts from the owner compensation and benefit accounts set up under Owner Pay, because those are the add-backs SDE exists to make and the easiest to prove. When the owner's salary, health insurance and retirement contributions sit on their own lines, the figures come straight out of the ledger and can be added back in full. The discretionary and one-off items come next, each with its ledger entry and the document behind it: the invoice, the contract, the court order, the lease.

Items without a document come off the schedule. The owner may feel entitled to that money, but a buyer will strike an undocumented add-back anyway, and striking it in front of the owner costs more than the item. It tells the buyer the rest of the schedule may be just as soft, and every remaining line then gets the same suspicion. An owner who takes the unsupported items out before the meeting keeps the buyer's attention on the ones that hold.

The illustration shows the arithmetic. A business claims SDE of $205,000, of which $30,000 is add-backs other than the owner's own pay. If only 60 percent of those have documents, a buyer will count SDE of $193,000. At an illustrative two and a half times SDE, the $12,000 the owner could not support costs $30,000 of price, and that is before anyone prices the buyer's lost confidence in the rest of the schedule.

The limit on non-owner add-backs applies the same logic to the schedule as a whole. When much of a business's SDE comes from adjustments, its earnings look different every time someone new examines them. Keeping those adjustments to a modest share means most of the SDE comes from profit and owner pay that the books show directly, and a buyer can verify it without having to accept a list of exceptions. Documented add-backs get counted in full, so the earnings the buyer multiplies are as large as the business can honestly claim.

Adjustments run both ways

The word add-back suggests that every adjustment raises SDE, and an owner building a schedule for a sale is naturally drawn to the ones that do. A buyer's accountant reads the schedule looking for the ones that lower it, and a schedule with none is the clearest sign that it was built to reach a number.

Some adjustments do lower SDE. A one-off gain, such as an insurance payout, the sale of a piece of equipment or an unusually large order that will not recur, inflated the year's profit and has to come out, for the same reason a one-off legal cost is added back: the buyer is pricing the earnings that will continue. Rent is a common case. A business that rents its premises from its owner below the market rate has a lower cost than a new owner will face once the owner, now a landlord, charges market rent. The schedule restates the rent to market, which reduces SDE, and a rent above market is restated the other way.

Putting in the adjustments that cut against the owner makes the SDE figure right, and it also changes how the rest of the schedule is read. A buyer who sees that the owner has already taken out the windfall and restated the cheap rent has less reason to suspect the add-backs that remain, and tends to check them for confirmation instead of hunting for reasons to strike them.

An outsider walks it first

Before any opinion of value is sought, the outside accountant walks the schedule line by line, and the SDE figure reflects their changes.

The walk tests each add-back against its source and nothing else. The accountant is asked whether each line is what it says it is, and never what the business is worth. Any item worth a meaningful share of SDE is re-performed from the documents, and every item of any size has to carry its source. The owner accepts the accountant's changes without arguing them, for a simple reason: an owner who will not accept a change from their own accountant will not get the line past a buyer's.

A schedule that has already survived one independent walk can be tested quickly by a buyer's accountant, and a quick test is a cheap one. That shows up in the buyer's willingness to proceed, and in the price, because there is less left to be uncertain about.

The timing is deliberate. No opinion of value is obtained at this stage. A broker's estimate of what the business would sell for is sought only once the business's own valuation exists, and when it arrives it is recorded as a price to be reversed into what it assumes, never as evidence for the schedule. A number heard early anchors everything after it. An owner who has heard a broker name a multiple will, without meaning to, build a schedule that supports it. An owner who builds the schedule first and hears the broker afterwards can read the broker's number as a price with assumptions inside it, and test them.

What has to be in place first

Two conditions come first, and both are earlier work on the bridge. The schedule is computed from twelve closed months, which come from Monthly Close; SDE built on open months is an estimate of an estimate. And the owner's pay must already be separated from business expenses under Owner Pay, so that the owner lines on the schedule are read from the ledger and not rebuilt from the owner's memory.

Knowing that it works

Every add-back above the re-performance threshold should carry its source documents, so the share that does should be all of them. Non-owner add-backs, as a share of SDE, should stay within the modest bar the business has set. A share creeping upward means the schedule is being asked to carry more than the books show directly.

The check that can be put to the owner is to defend the schedule alone, explaining every line and naming its document, with neither the bookkeeper nor the broker in the room. It is the test the owner will face in the first meeting with a buyer, and passing it in private spares them finding out in public which lines they cannot explain.

Why it slips, and what holds it

The decay here is personal spending creeping back into the business. Each new personal item the business pays for becomes, at the next sale, another add-back to claim and defend, and personal items rarely come with the documents a buyer will want.

The safeguard is to rebuild the schedule at every year-end close instead of once, just before a sale. A new personal item then appears as a new add-back in the year it was spent, while its document is still easy to find and while the owner can still decide to stop the spending. A schedule rebuilt every year also has a history, and a buyer who can see five years of schedules prepared the same way has far less reason to doubt the latest one.