The ONE Number That Exposes Every "Profitable" Business
Why owners are delusional and how to use the "SDE Rebuild" to stop yourself from buying a pig with lipstick on
Welcome the new DealBrahz ( better than BuyBros? ) to The $10M Acquisition Journal who joined us since last edition 🎉!
Missed the last one? Read here 👇
A first look at SDE (Sellers Discretionary Earnings) and why it might be the single most important number of my acquisition journey.
Before we get into the meat of this badboy, a quick note for those following my acquisition journey: I joined a private entrepreneurial acquisitions community 🎉.
I’ll be leaning heavily on them as I evaluate deals and continue this journey, but today’s focus isn’t the community, I’m focusing on the ‘tool’ I’m learning to wield.
This issue is all about SDE:
What it is
How it works
Why everything hinges on it
And for paid subscribers, I’m including a full SDE rebuild walkthrough from a real business I analyzed recently.
( No identifying numbers, no sensitive details ofc. Just the structure and insights. )
It’s the closest I’ve come so far, to understanding how serious buyers ( me! ) are able to separate fantasy from reality.
When I Thought ‘Profit’ Meant Something… Like an Idiot
I believed the health of a business was obvious.
The owner tells you what they make, hands over a P&L, waves at revenue like it’s a trophy and you just… believe it. Well, to be fair, it’s unlikely that they will be lying about the revenue. Just keep reading lol.
I’ve always assumed that if the business had decent revenue and wasn’t drowning in expenses, it was probably “good enough.”
I was wrong. Yet again 🤷.
It wasn’t until I really learned the meaning of the ‘word’ SDE. Seller’s Discretionary Earnings.
The number that actually matters for people like me. It’s the number the entire acquisition world orbits around.
This single number that tells the truth while everything else is kind of just noise.
SDE: The Number That Doesn’t Care About Your Feelings
SDE is not profit.
I’ll say it again for the people in the back …
📣 SDE IS NOT PROFIT 📣
It isn’t some fancy ass metric an owner invents to make the business look good.
It’s the real economic benefit of owning the business as a single working operator.
A simplified formula looks like this:
Where:
NI = Net Income
OS = Owner Salary
DA = Depreciation & Amortization
PON = Personal / One-Time / Non-Operational Add-Backs
R = Required Expenses the Owner Ignored
The fun part for me is that I get to rebuild the number from the ground up, piece by piece, on every deal I’ll be looking at, until I find the real heartbeat.
This process is both mechanical, slightly laborious and … uncomfortable.
It will force me to confront the difference between the business the owner thinks they’re running and the business they’re actually running.
Buying a Business or Handcuffs
SDE answers the biggest, most important question for any of us buyers:
Can this business support an operator, or will I become the operator?
See, those are two very different paths:
If SDE is strong, you can hire help.
If SDE is weak, you inherit another job - yuck.
If SDE is inflated, you inherit a problem disguised as a business.
And nothing exposes a weak SDE faster than rebuilding it yourself.
I learned that firsthand.
The Day I Tore Apart a Business and Accidentally Found the Truth
I won’t share the financial details here, but I can share the experience.
I went through the fun process of rebuilding SDE for my buddy’s dad’s business. I knew he was trying to retire. I knew his biz has been around for 20+ years. Checking a lot of my boxes! On the surface, the numbers looke fine. Not great, not terrible.
But once I stripped out the owner’s perks, normalized the expenses, identified the one-time repairs, and added back non-cash charges, the “story” changed.
It wasn’t necessarily disastrous. It also wasn’t incredible.
It was simply real.
And that’s the entire point of SDE: it wipes the fog off the glass.
What the owner thinks they make doesn’t matter.
What the tax return says doesn’t matter ( it does, but I’m driving home a point here lol ).
What the P&L hints at doesn’t matter.
The only thing that matters to me, is the number at the bottom of the damn SDE calculations.
The Good, The Bad, and The ‘Oh God Please No’
(from someone still learning, so this list will grow)
The Good
SDE is clarity. It’s the x-ray of small business.
It strips away storytelling and shows the machine.
It tells me:
how much the owner actually takes home
whether the business can afford staff
what add-backs are legitimate or nonsense
what debt the business can realistically support
I’m using it as the the foundation of every decision I make.
The Bad
Small-business bookkeeping is chaos disguised as spreadsheets. Sometimes it is actually just an excel sheet. Nothing wrong with that though. I love me some sexy spreadsheets!
The problems arise when the owners mix personal with business. Purposely or by accident.
Some things I’ve heard ( and I’m willing to bet I’ll see soon enough ):
forgetting to categorize things
‘temporarily’ running vacations through the company card - whoops!
not distinguishing repairs from capital improvements
Rebuilding SDE is part detective work, part therapy, part anger room.
Oh God Please No ( The Ugly )
If SDE is low - or fragile - everything collapses.
A business can have great revenue and still be worthless.
Or worse: fkn dangerous ( for me at least ).
If SDE can’t support an operator, guess who becomes the operator?
Me. BigB. Bear. Burrito. [whatever nickname my wife/kids come up with]
That’s not the type of ownership I’m into. That’s more like a self-imposed prison sentence to me.
Future Me Will Thank Present Me for Asking These Questions
As I start analyzing more and more opportunities, I’ve been putting down some thoughts ( and the dope community I just joined can chime in if these are useful or not ) and questions I’ll be drilling into:
Are the add-backs valid? Or are they more like wishful thinking?
Is the owner’s salary realistic or artificially low/high?
What expenses will I inherit that the owner conveniently ignores?
Are one-time expenses truly one-time?
Is the SDE strong enough to support debt + staff?
How fragile is the number? What fkn breaks it?
I’m not an expert yet. Not even close.
But sitting down and trying to understand these questions early might save me from buying a well-decorated trap. ( I really wanted to use the ‘IT’S A TRAP’ meme here again, but I just used it recently so I’ll hold off for now. But, it would’ve 100% been here ).
Let’s Put Some Numbers in a Headlock
Below is where I walk through a real SDE rebuild:
The shit I did, what I found, what surprised me, and how the final number shifted once everything was normalized.
This is the most practical part of the newsletter, and it’s the closest look yet at what I’ll be doing as I search for my first acquisition.
👇 The detailed SDE rebuild walkthrough starts below.
Before we get into the full teardown, I put together a clean SDE Rebuild Template you can copy into Google Docs.
If you want to run your own numbers the way I ran mine, you’ll find the link just after the breakdown.
