We're getting ready to list our hardware store in the next few months. Our broker looked at our initial SDE statement and said it was 'messy', his word. Too many add-backs that no buyer would accept, personal stuff mixed in, and some owner expenses that weren't clearly documented. I've spent the last few weeks cleaning it up. Removed the obvious personal expenses, got proper receipts for the owner-related add-backs, and separated one-time costs from recurring ones. Curious how others approached this. What did you strip out or keep in that buyers actually questioned?
SDE prep
How I cleaned up my SDE statement before listing my store
The biggest thing for us was owner health insurance. We had it as an add-back but didn't have a clean paper trail showing it was truly a personal expense paid by the business. Buyer's accountant flagged it immediately. We ended up removing it entirely and just taking the hit on SDE. Not worth the argument.
How much did your SDE drop after the cleanup? That's the real question. Buyers will always push back on add-backs, but if you overcorrect you're just giving away value.
About 8% lower than our first draft. Some of that was necessary—the personal vehicle was clearly not defensible. But a few things I kept because I had the documentation: the one-time inventory software migration, and the owner's cell phone since it was used for store operations.
8% sounds reasonable. We saw a similar reduction. The broker told us that buyers typically discount whatever you present by 10-15% anyway, so it's better to present a conservative number you can defend line by line than an aggressive one that makes them distrust the whole statement.
Did you include a written explanation for every add-back? We did a one-page schedule that listed each adjustment, the amount, and a brief justification. It cut down on the back-and-forth significantly. Buyers still negotiated but they didn't waste time asking what each line was.
This might be a dumb question but what exactly counts as a one-time expense? We had a roof repair last year that I wanted to add back but our accountant said no because it's a capital improvement, not an operating expense. Still confused about where the line is
Roof repair is tricky. If it's a repair it might be deductible as an expense, but if it's a replacement it's capitalized. Either way it's usually not an SDE add-back because a buyer will expect to maintain the building. One-time means things like a legal settlement, a move, or a rebranding—stuff that won't happen again under normal ownership tbh.
We also removed any add-backs related to family members on payroll. Our broker said buyers see that as a red flag—either the family member wasn't really working or the expense will disappear after the sale, which changes the economics. It was a small amount but it cleaned up the narrative
That's a good point about family payroll. We didn't have that issue but I can see how it would raise questions. We did have a part-time bookkeeper who was also a friend—we kept her on the payroll but documented her actual duties and hours so the buyer could see it was a real position.
Did the broker give you a template or did you build the cleaned-up statement yourself? We're not at the listing stage yet but I want to start getting our books in order.
Our broker had a template but it was pretty basic. We ended up rebuilding it in a spreadsheet with columns for original expense, add-back amount, and notes. That made it easy to adjust when buyers asked questions tbh.
One thing that helped us was having our CPA review the adjusted statement before we sent it to anyone. It cost a few hundred dollars but it gave us confidence that the numbers would hold up. The buyer's accountant still hwd questions but they were minor.
So is the general rule that if you can't explain it in one sentence to a skeptical buyer, you shouldn't include it?
Pretty much. If it requires a paragraph of justification, it's probably going to be negotiated away anyway. Better to present a clean number and let the buyer feel like they're getting a fair deal.
We also removed any add-backs for expenses that were paid in cash without receipts. Our broker said those are impossible to defend and can make the whole statement look unreliable. It hurt to remove them but it was the right call.
Thanks for the input. I think we're in a better place now. The statement is more conservative but it's defensible. I'll update once we get some buyer feedback.