A listing says the business earns $400K. The broker's summary says it too, and so does the seller. None of them is lying, exactly. They are all repeating one number, and that number was calculated by the seller, from records the seller prepared, using add-backs the seller chose.
Verifying it means arriving at your own figure from the source documents, and then comparing the two. This is the order that finds the most, soonest.
1. Start from the tax return
A profit-and-loss statement is a document the seller prepared. A tax return is a document they signed under penalty of perjury. Overstating income on a return costs the seller real money every year, so of all the documents you will see, the return is the one least likely to flatter the business.
That makes it the floor. Ask for three years of returns, then rebuild the earnings from the most recent one:
| Line on the return | What to do with it |
|---|---|
| Ordinary business income (the bottom line) | The starting point. |
| + Officer or owner compensation | Add back only what one working owner was paid. |
| + Depreciation and amortisation | Non-cash. Add back. |
| + Interest | The seller's financing is not yours. Add back. |
| + Documented one-off costs | Only with proof, and only if they do not recur. |
| + Personal expenses run through the business | Only with proof, and only if the business does not need them. |
The result is SDE as the return supports it. Set it next to the stated SDE. If the two are within a few percent, the seller's arithmetic holds and the rest of diligence is about the business. If they are far apart, the rest of diligence is about that gap.
2. Reconcile the P&L to the bank statements
The return proves the business declared its income. The bank statements prove the money arrived. Ask for twelve months of statements for every operating account and compare total deposits to the revenue on the P&L for the same months.
They will not match to the dollar. Timing, sales tax, refunds and transfers between accounts all move the figure. What you are looking for is a gap that is larger than those explanations, or a gap that grows in the months right before the business was listed.
For a cash-heavy business, this check matters more than any other, because the P&L is the only place unbanked cash can appear.
3. Test every add-back, one at a time
Add-backs are where the stated number and the documented number part ways. Each one is a judgement the seller made about their own business, and each dollar of add-back is worth the asking multiple in price.
Ask for the add-back schedule as a list, with the source of every line. Then apply one test to each: does this cost actually disappear when the owner changes? Which add-backs are legitimate, and which are red flags walks through the common ones. The three that fail most often:
- A "one-time" cost that appears in more than one year. It is maintenance, not an event.
- The owner's full salary, added back in a business that needs a working manager. Only the amount above a replacement's pay is discretionary.
- A family member's salary, when the family member does real work you will have to pay someone else to do.
4. Look at three years, not the best one
One year cannot show a trend, and the trend is most of what you are buying. Line the three returns up and read across: revenue, gross margin, the owner's pay, the add-backs.
Two patterns deserve a direct question. Earnings that jump in the year the business was priced, after two flat years. And add-backs that grow faster than revenue, which usually means the seller has been reclassifying costs rather than cutting them.
5. Put the gap in dollars
The point of all this is a number, not an opinion. Take the stated SDE, subtract what the documents support, and multiply the difference by the asking multiple.
A worked example, from a real deal shape: the listing states $400K of SDE and asks $1.15M, which is about 2.9× earnings. The 2023 return supports $310K once three add-backs fail the test. The gap is $90K. At the asking multiple that is roughly $260K of price with nothing underneath it.
That figure is your negotiating position. Sellers argue with opinions. They engage with a specific dollar amount traced back to a line on their own tax return.
Acquire Scout runs these checks on the documents you upload. It rebuilds SDE from the P&L and tax returns, tests each add-back, and cites every figure to its source line. See the diligence walkthrough, or the sample report for the $400K deal that verified at $310K.