When you sell your business, one of the most important numbers is Seller’s Discretionary Earnings (SDE). This single figure becomes the heartbeat of the deal — it tells buyers how much they can expect to take home and it tells lenders whether the business can carry debt. Brokers calculate SDE by recasting tax returns, adding back expenses that benefit the owner personally, or removing one-time costs that won’t recur. Done right, it’s a powerful tool. Done sloppily, it can create mistrust, derail financing, and even kill a deal.
So what happens when your broker says your business earns $300,000 SDE, but the SBA lender recalculates it as $225,000? Suddenly, your deal feels like it’s built on sand. Let’s unpack why this happens, what it means, and how you can protect yourself from the fallout.
Why the Numbers Don’t Match
1. Brokers vs. Lenders Have Different Perspectives
- Brokers want to showcase your business in the best possible light. Their goal is to attract buyers and justify a strong asking price.
- Lenders are conservative by design. Their focus is risk management. They strip away anything that feels discretionary, subjective, or undocumented.
2. Add-Back Disputes
- Brokers may add back travel, meals, family payroll, or home office expenses.
- Lenders often reject these, arguing they’re necessary for running the business or not clearly personal.
- Scenario: A broker added back $18,000 for meals and entertainment. The lender disallowed it, stating, “Customer lunches are a legitimate business expense; they’ll continue under new ownership.”
3. Owner’s Salary Treatment
- Brokers typically add back one owner’s salary, assuming the buyer will replace themselves as operator.
- Lenders subtract a market replacement wage, reasoning that the role must still be filled.
- Scenario: A landscaping company showed $100,000 SDE after adding back the owner’s wage. The lender inserted a $60,000 replacement wage and dropped SDE to $40,000.
4. Lack of Documentation
- Without receipts or notes, lenders disallow add-backs.
- Scenario: A seller added back “one-time legal fees” of $25,000 but had no supporting invoice. The lender treated them as ongoing professional fees and rejected the adjustment.
Why Doing It Right the First Time Matters
When numbers keep changing, lenders lose confidence. If the broker presents $300,000, then after questions it drops to $260,000, and then again to $225,000, the lender wonders: What else isn’t accurate? Buyers start doubting too. Deals that should feel strong suddenly feel shaky. Consistency builds trust; inconsistency creates suspicion.
A professional recast isn’t just about getting the highest number — it’s about getting a defensible number. Lenders and appraisers need to believe they can rely on it. If they don’t, the deal slows down or collapses.
How to Prevent the Problem
- Prepare Your Paperwork Early
Don’t wait until a buyer asks. Work with your broker and CPA to organize tax returns, P&Ls, and supporting documents. Know what every expense is and be ready to explain it. - Keep Notes Throughout the Year
If you ran a one-time marketing campaign, note it. If you bought equipment that won’t be replaced, document it. Lenders love clarity; they dislike guesswork. - Think Like a Lender
Before adding back an expense, ask: Would a new owner really eliminate this cost without hurting the business? If the answer is no, don’t count on it. - Align Broker and Lender Perspectives Early
Ask your broker to recast conservatively, anticipating what a lender will accept. That way, you won’t be surprised later.
What Can Be Done If There’s a Mismatch
- Review the Add-Back Schedule Together: Go line by line with the lender. Some items may be negotiable if supported with receipts or contracts.
- Provide Documentation: Back up one-time expenses with invoices, board notes, or CPA letters.
- Adjust Expectations: Sometimes, the lender’s lower number stands. If the buyer can still meet debt service and justify the price, the deal can move forward.
- Recast Again if Needed: The broker may update the CIM and valuation to reflect the lender’s version, keeping all parties aligned.
The Takeaway
Recasting is both art and science. Your broker paints the business in its best light; the lender tests that light for cracks. The key is transparency, documentation, and consistency. Do it right the first time, and you save months of stress, protect your credibility, and keep your buyer and lender on board. Do it sloppily, and you risk watching your deal unravel just as the finish line comes into view.
Pro Tip: Ask your broker upfront: Would these recasts hold up under SBA lender scrutiny? A defensible SDE is not just a number — it’s the foundation of your deal.
Simone Dominique is an industry analyst focused on the human side of business transitions. Through her writing and research, she provides clarity on the M&A process for owners and buyers, exploring the intersection of market data and owner psychology.
