Buy-Side · Earnings Quality
SDE and EBITDA recasting.
The earnings figure on a broker's listing is a starting point, not a conclusion. We rebuild it to a basis a lender and a diligence team will accept, so the number you underwrite the deal on is the number that survives scrutiny.
The problem
The headline earnings number rarely survives a lender's review
Broker-presented SDE and EBITDA are built to support an asking price. Add-backs are generous, one-time items get folded into recurring earnings, and the cost of replacing the owner’s labor is left out. When a lender or a quality-of-earnings team recasts the figure to a defensible basis, the earnings that anchored the valuation often shrink, and with them the price the deal can carry. Recasting the number before you make an offer means you negotiate and underwrite on the earnings that will hold, not the ones that will not.
What's included
What the recasting covers
✓Reconciliation from reported net income to EBITDA and to SDE
✓Line-by-line review of every claimed add-back for documentation and defensibility
✓Separation of recurring earnings from one-time and discretionary items
✓Replacement-management cost where the buyer will not perform the owner's role
✓The distinction between the SDE a broker uses and the EBITDA a lender underwrites
✓A defensible earnings basis you can take into negotiation and financing
✓Identification of the add-backs most likely to be challenged in diligence
✓A written recast you can share with your lender and QoE provider
How it works
From listing SDE to a defensible number
01
Send the financials
The broker P&L, tax returns, and the add-back schedule if one exists. We work with what you have.
02
We rebuild the earnings
We reconcile net income to EBITDA and SDE and test every add-back against documentation.
03
We separate real from claimed
Recurring earnings are distinguished from one-time and discretionary items, and replacement-management cost is applied where it belongs.
04
You get a defensible basis
A recast earnings figure you can negotiate and finance on, with the challengeable items flagged before diligence finds them.
Who it's for
Built for buyers pricing a deal on the seller's numbers
Searchers, independent sponsors, and first-time buyers working from a broker’s earnings figure who want to know what that number looks like once a lender recasts it. If your valuation rests on SDE or EBITDA you have not independently tested, this is the analysis that tells you whether the price holds.
Questions
Common questions
What is the difference between SDE and EBITDA?
SDE (seller's discretionary earnings) adds back one owner's total compensation and benefits on top of interest, taxes, depreciation, and amortization; EBITDA does not. SDE is the common measure in small-business brokerage; EBITDA is closer to what a lender underwrites. The gap between them is essentially the market cost of the owner's role, which is why it matters so much to a buyer who will need to replace that role.
Which earnings figure will my SBA lender use?
Lenders underwrite acquisition cash flow on an EBITDA-based measure, not the SDE a broker presents. A valuation built on SDE without understanding how the lender will recast it can overstate what the deal supports. We rebuild the figure to the basis the lender will actually apply.
How do I know which add-backs are legitimate?
Every claimed add-back should trace to documentation: invoices, payroll records, contracts, or tax records. Owner compensation and genuine one-time items are usually defensible; discretionary personal expenses and unsupported adjustments frequently are not. We test each one and flag the ones a diligence team will challenge.
Is this a quality-of-earnings report?
No. This is a recast to give you a defensible earnings basis before you commit to a deal. A formal quality-of-earnings engagement is performed by an independent provider, and we can hand off to one when the deal warrants it.
Is the earnings number real?
A confidential call is the fastest way to see what the deal looks like on a defensible basis.
Schedule a Confidential CallNexTax Advisory provides financial and tax advisory services. It does not provide legal services or formal audit or attest engagements. Analysis is intended to inform your decisions alongside your attorney, lender, and independent quality-of-earnings provider, not to replace them.