Not if you buy the business with a loan. Seller's discretionary earnings, or SDE, is the cash flow before your loan payments, so on a business with $300,000 of SDE financed with a $700,000 loan over 10 years at 10%, about $111,000 a year goes to the bank first and roughly $189,000 is left for your pay, your taxes and everything else.
That gap surprises a lot of first time buyers. A listing shows one big number, and it is easy to read it as a salary. It isn't. It is the starting point for the math, not the answer.
What SDE actually measures
SDE is the total cash benefit the business produces for one full time owner. It starts with pretax profit and adds back the owner's own pay and benefits, interest, depreciation, amortization, and documented personal or one time expenses.
Notice that interest is added back. SDE shows the business as if it carried no debt, which makes it useful for comparing one business to another. But if you buy with bank financing, you will carry debt, and those payments come out before you see a dollar.
The math, worked through
Here is the example from the video, step by step. The rate and term are an illustration; your lender will quote the real ones.
- SDE: $300,000 a year.
- Loan: $700,000 over 10 years at 10%, which works out to about $9,250 a month, or about $111,000 a year.
- Left after loan payments: about $189,000.
That $189,000 is not take home pay yet. It has to cover your own salary, your income taxes, equipment that breaks, and anything you want to reinvest in the business. The more you borrow, the thinner that slice gets. Borrow $500,000 on the same terms instead and the annual payment drops to about $79,000, which leaves noticeably more room.
SDE answers "what does this business produce for an owner with no debt?" The question you need answered is "what is left for me after the bank is paid?"
Why lenders care about coverage
Lenders look at the same math from their side. Under the current SBA rules, most acquisitions need a cushion: the business's cash flow has to cover the loan payments at least one and a quarter times, measured on historical earnings rather than projections. In this example, $111,000 of payments means the lender wants to see at least about $139,000 of cash flow available to pay them.
This deal clears that bar comfortably. But coverage is the lender's minimum, not your household budget. A deal can satisfy the bank and still leave you short once you take a fair salary and pay your taxes.
How to read a listing
When you look at a business for sale, don't stop at the SDE. Confirm the SDE is documented and holds up, run the loan payments first, then subtract the pay you actually need to live on. What's left is your cushion for taxes and surprises. If that number works, you have a deal worth a closer look. For more on financing and what to check before you make an offer, see my guide to buying a business.
Ready to talk it through? Talk with me about selling. No cost, no obligation.
Read the transcript
Buyers ask me if a business with $300,000 in SDE will pay them $300,000 a year. In some cases it will, in others it won't. Here's why.
SDE is the cash flow before your loan payments. And if you buy a business with bank loans, those payments come out first.
Let's say you borrow $700,000 over 10 years at 10%. That works out to about $111,000 per year in payments. That leaves you with about $189,000, and that has to cover your own pay, your taxes and anything else that breaks in the business.
That's why lenders look at coverage. Under current SBA rules, most acquisitions need a cushion. Your cash flow has to cover the payments at least one and a quarter times.
So when you look at a listing, don't stop at SDE. Run the loan payments first and then see what's actually left for you. If you know someone who's shopping for a business, send this to them.
