SDE, EBITDA and Add-Backs: How Lenders Read the Cash Flow of a Business You're Buying

The listing says the business produces $420,000 of seller's discretionary earnings, and the asking price is a tidy multiple of that. You run your own numbers, they look fine, and you sign an LOI. Then the lender's analysis comes back and the cash flow they're willing to count is a lot smaller. Nobody lied. The broker, the buyer, and the lender were each measuring a different number and calling it "cash flow."

Knowing which number is which, and how a lender gets from the listing figure to its own, is one of the most useful things a buyer can learn before making an offer. FTI Capital is a broker and advisor, not a lender. On acquisitions, much of our work is rebuilding the seller's earnings the way an underwriter will, early enough that the price and structure can still change.

The 30-second version

Three numbers, three jobs

SDE: seller's discretionary earnings

SDE starts with the business's pre-tax profit and adds back the owner's salary and payroll taxes, interest, depreciation and amortization, and personal or one-time expenses the owner ran through the company. The question it answers is how much cash this business generates for one working owner. Most owner-operated businesses are listed and priced as a multiple of SDE.

EBITDA: earnings before interest, taxes, depreciation and amortization

EBITDA makes most of the same adjustments, but it assumes the business pays a market-rate salary to whoever runs it. It describes a business that runs without its owner, which is why larger acquisitions and private-equity buyers price on it. For the same company, EBITDA is lower than SDE by roughly the cost of a manager.

The lender's number: cash available for debt service

Lenders don't take either figure at face value. They generally rebuild cash flow from the business tax returns, add back only what's documented and believable, deduct a reasonable salary for the new owner or manager, and may deduct taxes and the cost of keeping equipment working. The result is the cash that's really available to pay the new loan. Exact methods vary by lender, but that's the general shape.

A worked example (hypothetical)

These are made-up round numbers, not a client deal, to show how the figures drift apart:

• Net income on the tax return: $210,000
• Owner's salary and payroll taxes: + $120,000
• Depreciation and amortization: + $40,000
• Interest on existing debt (paid off at closing): + $15,000
• Owner's personal vehicle run through the business: + $12,000
• "One-time" marketing campaign: + $25,000
• SDE as listed: $422,000

Now the lender's pass. The marketing campaign turns out to have run every year for three years, so it's an operating cost, not a one-time item. That's −$25,000. The other adjustments are documented, which leaves $397,000. You plan to run the business yourself, and the lender deducts a reasonable salary for that role, say $110,000, bringing the figure to $287,000. The equipment is aging, so the lender also reserves $30,000 a year to replace it. The lender's number is about $257,000, roughly 60% of the listing figure.

If the new loan payments (including any seller note being paid currently) come to $190,000 a year, coverage is about 1.35x. That's workable with many lenders. But if the price had been pushed up so that payments reached $240,000, the same business would cover them only about 1.07x, and most lenders would want a different price or structure. The business didn't change between those two scenarios. Only the price did.

Debt service coverage: the ratio that decides the loan

Debt service coverage is the lender's cash-flow figure divided by the total annual payments on the business's debt. At 1.0x, every dollar goes to the bank and nothing is left for a bad month. Lenders commonly want a meaningful cushion above that, often somewhere around 1.25x, though requirements vary by lender, industry and SBA program rules, and they change. Treat any single number you read online, including this one, as a starting point for a conversation with a lender, not a rule.

• All the debt counts. The new SBA loan, any equipment loans that stay with the business, and seller-note payments unless the note is on full standby. (Our post on seller financing in an SBA acquisition covers how standby works.)
• Your personal finances can count too. Many lenders also run a global cash-flow analysis that combines the business with your personal income and obligations, so a large personal debt load can tighten things even when the business looks fine.
• Trend matters. Coverage based on a three-year average reads differently from coverage based on one strong year. Lenders often look at both.

Adjustments go both ways

Buyers usually think of add-backs as the things that raise earnings. A careful underwriter also looks for costs the seller isn't paying now but you will have to pay:

• Below-market rent. If the seller owns the building and charges the business little or no rent, a lender will typically adjust to the rent you'll actually pay under the new lease.
• Unpaid or underpaid family help. A spouse who keeps the books for free is a real cost the business will have to cover after the sale.
• Deferred maintenance and capital spending. Depreciation is added back, but trucks, ovens and software still need replacing. If the seller has been putting it off, expect the lender, and your own planning, to account for it.
• Owner-dependent revenue. If key customers buy because of the seller personally, the lender may discount that revenue or want a transition plan before it counts.

For the documentation side of add-backs, and which ones usually hold up, see seller financials: what a lender needs to see.

When the price and the cash flow don't match

If the lender's number can't support the payments at the agreed price, the usual options are:

1. Lower the price to what the verified cash flow supports. This is often the cleanest answer, and the lender's analysis gives you an objective basis for asking.
2. Put in more equity, which reduces the loan and the payments. (See how much down payment you need to buy a business.)
3. Shift part of the price to a seller note, possibly on standby, so it doesn't count against coverage in the early years.
4. Walk away. If the earnings only work with add-backs nobody can document, that's a due-diligence finding, not a financing problem.

A buyer's checklist before you sign the LOI

• Get the business tax returns for at least the last three years, not just the broker's SDE summary.
• Rebuild SDE yourself from the returns, line by line, and mark which add-backs have documents behind them.
• Subtract a realistic salary for whoever will run the business, and a reserve for equipment replacement if the assets are aging.
• Look for adjustments in the other direction: rent, family labor, deferred maintenance.
• Estimate annual payments on all the debt at the proposed price, then check the coverage with some cushion to spare.
• Make the LOI conditional on financing and on verifying the financials, so a gap you find later doesn't cost you your deposit.

How this works with FTI

1. Consult. A free call to look at the listing, the returns you have, and the proposed price, and to give you a straight read on what a lender is likely to count.
2. Structure & package. We rebuild the cash flow the way an underwriter will, document the add-backs, and help you shape the price, equity and seller note so the deal covers its debt.
3. Match & close. We take the package to lenders whose appetite fits the industry and deal size, and manage it through to funding. We've arranged $41.3M+ across 28 funded deals in 2025–2026.