Preparing Your Financials to Sell a Business: SDE, Add-Backs and What Buyers Check
By Josh Campbell, Business Broker · First Choice Business Brokers Dallas Metro · Updated October 2026
The core document package
- Federal business tax returns for the last 3 years
- Year-end profit-and-loss statements and balance sheets for the same years
- Year-to-date profit-and-loss statement and balance sheet
- An add-back schedule with supporting documents
- Bank statements (lenders often ask for 12 to 24 months)
- Accounts receivable and payable aging reports
- An equipment and fixed asset list
- An inventory count and valuation
- Leases, loans and important contracts
- Payroll summary and organization chart
What SDE is
SDE shows the total cash benefit to one full-time owner-operator:
SDE = Net profit + Owner's salary and payroll taxes + Owner's benefits + Interest + Depreciation/amortization + One-time and discretionary expenses
Add-backs buyers usually accept
- The owner's salary, payroll taxes and health insurance
- Depreciation and amortization
- Interest on business debt (the buyer will have their own financing)
- One-time expenses: a lawsuit, a move, a major repair that won't happen again
- Personal expenses run through the business, if documented: a personal vehicle, a family member who doesn't work in the business, personal travel
- Owner's retirement contributions
Add-backs that raise red flags
- "Cash sales not on the books." Lenders won't count them.
- Normal operating costs labeled as one-time.
- Very large or vague "personal" expenses with no receipts.
- Adding back a second owner's salary when that work would need someone to replace it.
- Rent below market when the owner owns the building. The buyer will pay market rent.
Normalizing adjustments
Buyers also adjust for things that will change after the sale:
- Market-rate rent if you're leasing from yourself
- Market-rate pay for a manager if you don't take a salary
- Family members paid above or below market
Clean-up steps 6 to 24 months before selling
- Make sure your profit-and-loss statements match your tax returns.
- Stop running personal expenses through the business, or at least document them clearly.
- Separate personal and business accounts.
- Move to accrual accounting or reviewed statements if you're a larger business.
- Collect old receivables and clear out dead inventory.
- Settle or document any pending disputes.
- Consider a quality-of-earnings review for larger deals.
Example add-back schedule
| Item | Amount | Support |
|---|---|---|
| Net profit (tax return) | $142,000 | 2025 return |
| Owner salary + payroll tax | $96,000 | W-2 / payroll report |
| Owner health insurance | $14,400 | Invoices |
| Depreciation | $31,000 | Return, depreciation schedule |
| Interest | $8,600 | Loan statements |
| Roof repair (one-time) | $12,000 | Invoice |
| SDE | $304,000 |
Josh's take: Every owner has a few "business expenses" that are really the family truck, the lake trip or a nephew on payroll. That's fine; buyers expect some of it. What kills deals isn't the add-back, it's the add-back you can't prove. If it isn't documented, it's a story, and buyers don't pay multiples on stories.
Frequently asked questions
Do I need audited financials?
Rarely, for Main Street deals. Clean tax returns and matching profit-and-loss statements are usually enough. Larger deals may need reviewed statements or a quality-of-earnings report.
What if my tax returns show low profit?
Lenders go by the returns. Documented add-backs help, but unreported income can't be counted.
How far back do buyers look?
Usually 3 years plus the current year to date.
Should I file amended returns before selling?
Talk to your CPA. Amending can raise red flags or create tax bills, so make that decision carefully.