Every digital business listing that crosses my desk comes with a seller discretionary earnings number. Sellers present it like it’s a fact. Brokers repeat it like it’s gospel. And buyers — especially newer ones — accept it at face value and build their entire offer around a number that may have been engineered to look better than it is.
I’ve looked at dozens of deals over the past two years, and I can tell you: SDE adjustments are where the real due diligence begins. The headline number almost never holds up completely. That’s not always dishonesty — sometimes it’s optimistic accounting, or a seller who genuinely doesn’t know how to present their financials cleanly. But you have to verify every adjustment yourself before you can trust any multiple.
What Is SDE and Why It Gets Manipulated
Seller discretionary earnings is the profit a business produces for a single owner-operator. It starts with net income and adds back the owner’s salary, personal expenses run through the business, depreciation, amortization, one-time costs, and anything else a new owner wouldn’t realistically pay. The idea is to show what the business actually earns for whoever owns it.
The problem is that “addbacks” require judgment, and judgment is where sellers have an incentive to push numbers upward. According to BizBuySell’s transaction data, SDE multiples for online businesses typically range from 2x to 4x trailing twelve months. On a $200,000 SDE business listed at 3x, every $10,000 in inflated addbacks translates to $30,000 in inflated asking price. The math matters.
The Six Addbacks I Always Question First
Not every addback is suspicious. Owner salary, one-time legal fees, a vehicle that’s clearly personal — these are standard. But there are six categories I slow down on every time.
Owner labor that won’t be replaced. If a seller adds back $80,000 in owner compensation but the business requires 40 hours per week to run, you need to either hire a replacement or value your own time honestly. The addback is technically correct, but only if you factor in replacement labor as an ongoing expense. I’ve seen buyers skip this and wonder why profitability looked so different post-close.
Inconsistent or “adjusted” revenue recognition. Watch for revenue that was deferred, pre-collected, or moved between months to smooth the P&L. If trailing twelve-month revenue looks suspiciously even or if any quarter stands out, ask for a monthly breakdown and cross-reference it with Stripe, PayPal, or bank statements. The money trail doesn’t lie even when the spreadsheet does.
Addbacks for “non-recurring” costs that recur every year. A server migration. A rebrand. A platform switch. These get labeled one-time events, but in a digital business, infrastructure investment recurs under different names. If the business has had a “one-time” tech cost three years running, it’s not one-time.
Affiliate commissions or contractor costs reclassified as equity distributions. Some sellers run contractor payments through owner draws to make the P&L look cleaner. Ask for a full list of 1099s issued by the business for the past two years and compare them to what’s showing in operating expenses.
Traffic and SEO costs buried in personal expenses. Link building, content production, and paid acquisition tools are sometimes paid personally by the owner and never appear in the business books. When this happens, you get a cleaner-looking SDE — but those costs will land on you the moment you take ownership and need to maintain growth.
Rent or shared office costs excluded entirely. In a home-based business, there’s often no office line item at all. Some buyers are fine with that. Others plan to hire, expand, or run the business with a team. If physical operations are relevant to your model, assign a market-rate cost for space and factor it in.
How to Reconstruct SDE Yourself
Don’t accept a seller’s SDE summary. Build your own. Request three years of P&L statements — monthly, not annual. Request three years of bank statements. Request the last two years of tax returns. Compare the three documents. They should tell the same story. When they don’t, that’s a conversation, not necessarily a dealbreaker — but you need to understand the gap before you move forward.
I use a simple process: start from net income on the tax return (which is harder to manipulate than a seller-prepared P&L), add back only addbacks I can independently verify, and then stress-test the number by asking what the business earns if I have to replace all owner-provided labor at market rates. That’s my conservative SDE. I build my offer range from there.
For more on how this fits into full acquisition analysis, see my piece on evaluating digital asset profitability before you buy — it covers the cash flow and growth metrics that should accompany any SDE review.
The Multiple Is Only as Valid as the SDE
Here’s what I keep coming back to: brokers and sellers present multiples as the variable and SDE as the fixed foundation. In practice, both are negotiable — and the SDE is often softer than it looks. When I find addback errors or inflated adjustments, I don’t just use that as emotional leverage. I rebuild the SDE with verified numbers and present the corrected figure to the seller. Then we negotiate the multiple on a real number.
That approach, combined with what I cover in my framework for negotiating asking multiples down, gives you two legitimate pressure points in any deal. Buyers who only focus on the multiple miss half the opportunity.
What I Look for in a Clean Deal
A seller who has clean, reconciled financials, can explain every addback in under 30 seconds, and doesn’t push back on document requests is a seller worth working with. That doesn’t mean their business is perfect — it means they’re operating with integrity, and that matters for everything that happens after the letter of intent.
The deals that close cleanly and produce what they promised almost always start with a seller who can prove their SDE. The deals that go sideways — the ones where buyers pay a 3.5x multiple on a number that turned out to be 2.7x — almost always trace back to addbacks that were never verified.
Do the work before you wire the money. The SDE is not a starting point. It’s a hypothesis. Your job is to prove or disprove it.