Small businesses are priced as a multiple of SDE, and SDE is profit plus add-backs. So the add-back schedule is where the asking price is really set. A seller who adds $50K of costs back to profit on a business asking 3× has added $150K to the price, and every line on that schedule is a judgement the seller made about their own business.
Most add-backs are honest. Some are optimistic. The job is to tell them apart, line by line, and it comes down to one question.
The one test
Does this cost actually disappear when the owner changes?
If the business still needs the thing the money bought, a new owner pays for it too, and it is not discretionary. If the cost was tied to this owner, this year, or this owner's choices, it goes.
That is the whole test. Everything below is that question applied to the lines that show up most.
Add-backs that usually hold
| Add-back | Why it holds | What to check |
|---|---|---|
| Owner's salary | A new owner sets their own pay. This is the core of the SDE convention. | Only one owner, and only up to what the business actually paid them. |
| Owner's benefits | Health insurance, retirement contributions and payroll taxes on the owner's pay are part of the owner's income. | They appear on the return, not just the schedule. |
| Interest | The seller's loans are not yours. | Nothing else is hiding in the interest line. |
| Depreciation and amortisation | Non-cash. | Whether the equipment behind it will need replacing soon. |
| Personal expenses with receipts | A phone, a vehicle or travel the business does not need. | The receipts, and whether the business really does not need it. |
| Genuine one-off costs | A lawsuit settled once, a move, a one-time professional fee. | It appears in one year only, with an invoice. |
The last two rows are legitimate in principle and the easiest to stretch, which is why they have a "what to check" column. A vehicle the owner uses for site visits is a business cost. A legal fee that appears every year is a legal budget.
Add-backs that are red flags
| Add-back | Why it fails | Ask for |
|---|---|---|
| A "one-time" cost that recurs | Repairs, equipment, "unusual" write-offs that appear in two of three years are maintenance, not events. | All three years, side by side. |
| The owner's full salary in a business that needs a manager | If someone has to run the shop day to day, a replacement's pay is a real cost. Only the amount above it is discretionary. | What a manager earns locally for that job. |
| A family member's pay | If the spouse or child does real work, you will pay someone to do it. | What they actually do, and their hours. |
| Marketing that was "not needed" | If revenue depended on it, cutting it cuts revenue. | Revenue by month against ad spend by month. |
| Rent above market to the owner's own building | Legitimate to normalise, but only to the rent you will actually pay. | The lease you will sign, not the one the seller had. |
| A pro forma or "adjusted" year | Revenue the business would have made, had something not happened, is not revenue. | The unadjusted figures. |
| Anything with no document | A line on a broker's schedule is a claim. | The invoice, the ledger detail, or the line on the return. |
The adjustments that go the other way
A schedule only ever adds. A buyer's version also subtracts, because some costs the seller did not pay, you will.
- An absentee owner. If the owner does not work in the business, or you will not, SDE overstates your take by the cost of hiring someone to do the owner's job.
- Unpaid family labour. A spouse who keeps the books for free is a bookkeeper you will have to pay.
- A lease about to reset. Below-market rent that expires at closing is a cost increase on day one.
- Deferred maintenance. Equipment that was not replaced is a cheque you will write.
None of these appear on a seller's schedule. All of them belong in your SDE.
Three examples from one deal
The sample report works through a listing that states $400K of SDE. Three add-backs fail the test and the documented figure is $310K.
- Owner's auto and travel, $28K. Booked as one-time, but the same charge appears on all three years of returns. A cost that recurs every year is not discretionary.
- A "one-time" equipment overhaul, $16K. Appears in two of the last three years. That is maintenance.
- Owner compensation, $120K added back in full. The business needs a working lead technician, and one costs about $74K locally. Only $46K of the $120K is above replacement cost, so only that part fails. The rest of the salary holds.
Two others pass: the owner's health insurance, because it shows on the return as an employee benefit, and a $6,500 legal fee for an entity restructure, because it is documented and happened once.
Acquire Scout tests each add-back on a seller's schedule against the uploaded P&L and tax returns, marks it accepted or rejected with the reason, and cites the source line. See how to verify a seller's earnings for the full set of checks, or what SDE is for the arithmetic underneath.