SDE Add-Backs in Arizona Business Valuations
Eddy Roche, Associate Broker · AZ license BR579487000 · HUB AZ / Sunbelt Arizona
Add-backs are how we rebuild cash flow a new owner can keep. Buyers and lenders challenge soft ones. Here's how I talk through them before we set an asking price.
What SDE is
Seller's Discretionary Earnings is the cash a full-time owner-operator would take from the business after we put owner pay and discretionary spending back on a clean line. Buyers price most Arizona owner-operated files on that number. They do not price on last year's revenue.
SDE is not EBITDA. SDE is the language on owner-operated Main Street deals. EBITDA shows up more on larger or manager-run companies. I use the measure that matches the buyer pool sitting in front of the file.
I rebuild SDE from the tax returns and the P&Ls. Net income is the start, not the answer. What remains should be a number a buyer and a lender can sit with.
What usually qualifies as an add-back
An add-back is an expense in the historical P&L that a new full-time owner would not need to pay, or that is discretionary. We add it back when we estimate SDE. That is the definition. It is not a promise that every line you hope to add will survive.
What Arizona buyers usually accept, when the paper supports it: documented owner compensation above a market manager wage. One-time, non-recurring costs. Clearly personal expenses run through the company.
I do not treat any category as automatic. Soft stories without an invoice, a tax-return line, or a recurring pattern get cut. I will tell you which add-backs I will defend and which ones I will not.
What gets challenged
Recurring "one-time" costs get challenged. So do lifestyle expenses mixed into COGS, and add-backs that disappear when the tax returns are compared to the P&L. Diligence is where weak add-backs die.
Inflated add-backs do not raise the asking price. They waste a listing term. A buyer, a CPA, and a lender will rebuild the same worksheet. If I cannot show why the dollar comes out, it stays in the expense column.
How that review runs on the seller side is on seller due diligence in Arizona.
Why tax returns still matter
Buyers and lenders start with the returns. The P&L is useful. It is not the last word. If an add-back is not on a return line, or the two statements do not tell the same story, the add-back is the first thing that gets cut.
Typically I want three years of returns for a serious valuation. Thin history makes the multiple and the add-backs harder to defend. I will not invent a multiple to fill a thin file.
Messy books also sit on the clock. See how long a sale takes in Arizona.
How this feeds the valuation
This page is the add-back conversation. The method lives on Business Valuation in Arizona. I rebuild SDE, then I price to what a buyer, a landlord, and a license transfer can support. No automated PDF. No teaser range from a form.
The form that starts that conversation is Value My Business. There is no obligation to list.
Start with a valuation
Send the basics. I look at the returns, walk the add-backs, and tell you which ones I will defend. No padded worksheet. No obligation to list.
Across Arizona
I work across Arizona. Restaurants, bars, service businesses, and contractors. I set the add-backs on the file in front of us, not on a slogan.
I am Eddy Roche, Associate Broker, Arizona license BR579487000. The office is 4745 N 7th St, Phoenix, AZ 85014. Hours are 9AM–8PM every day including weekends. Call (480) 405-3200.
Related reading: Business Valuation in Arizona, seller due diligence in Arizona, and how long a sale takes in Arizona.
Frequently Asked Questions
What is an add-back in SDE?
An expense in the historical P&L that a new full-time owner would not need to pay — or that is discretionary — so we add it back when estimating Seller’s Discretionary Earnings.
What add-backs do Arizona buyers usually accept?
Documented owner compensation above a market manager wage, one-time non-recurring costs, and clearly personal expenses — when the paper supports them. Soft stories without support get cut.
What add-backs get challenged?
Recurring “one-time” costs, lifestyle expenses mixed into COGS, and add-backs that disappear when the tax returns are compared to the P&L. Diligence is where weak add-backs die.
Is SDE the same as EBITDA?
No. SDE is the common language for owner-operated Main Street deals. EBITDA is more common on larger or manager-run companies. I use the measure that matches the buyer pool.
Do I need three years of returns?
Typically yes for a serious valuation. Thin history makes the multiple and the add-backs harder to defend.
How do I start?
Free valuation worksheet conversation at bizsalesguy.com/value-my-business or (480) 405-3200. Eddy Roche, Associate Broker BR579487000. Deeper method: business valuation Arizona.
Walk the add-backs on your file
No obligation. I look at the numbers and call you. Across Arizona.