Guide · Reading the numbers

What is SDE, and which add-backs will a lender actually count?

Figures verified on canada.ca, BDC and Job Bank pages on 2026-10-27.

SDE is the seller's number, and the lender's number is smaller. Seller's discretionary earnings is the profit a business is said to produce for one working owner before that owner is paid and before interest, tax and depreciation; the gap between it and what the records support is the add-backs, and the add-backs are where the risk in a small-business price usually sits.

What SDE is, and how it differs from EBITDA

Most Canadian small-business listings quote one earnings figure, usually called seller's discretionary earnings, adjusted cash flow or owner's benefit. It is built by the seller for the listing. The buyer's job, and the lender's, is to rebuild it from the seller's own records and keep only what those records support.

BDC describes EBITDA as net profit plus interest, income taxes, depreciation and amortization, and adjusted or normalized EBITDA as that figure corrected for one-time and extraordinary items such as nonrecurring income or expenses, legal fees and settlements, insurance claims and non-market rent. BDC also notes that EBITDA includes salaries, that bankers use it to judge how much cash flow is available to pay long-term debt, and that after due diligence the parties may revise the offer price based on an adjusted EBITDA or a different multiple.

SDE goes one step further and also adds back the pay of one working owner. That is why SDE is always the larger number, and why an SDE multiple is lower than an EBITDA multiple for the same business. Applying an EBITDA multiple to an SDE figure overstates the price every time.

The add-backs, and the test each one has to pass

Owner pay. The seller's salary, bonuses and dividends are added back because the buyer sets their own pay. It must be one owner: if a spouse or second family member is on payroll and also added back, the buyer is paying for two jobs with one salary.
Payroll costs on that pay. The employer share of CPP and EI goes away with the salary. In 2026 the employer CPP rate is 5.95% of earnings between the $3,500 basic exemption and the $74,600 maximum, plus 4% on earnings from $74,600 to $85,000, and the employer EI premium is $2.28 per $100 of insurable earnings up to $68,900, a maximum of $1,572.30 per employee.
Depreciation and interest. Depreciation is added back, but a business that replaces a truck every three years still buys the truck, so the buyer's model carries that spending. Interest is added back only on debt, not on finance charges inside equipment leases that stay with the business.
Personal expenses run through the business. Vehicle, phone, travel, meals, home office. Each needs proof it was personal and a reasonable split. For a vehicle, the 2026 tax-exempt allowance rate of 73 cents a kilometre for the first 5,000 km and 67 cents after that gives a yardstick for the business share. If the business still needs the truck, only the personal share is an add-back.
One-time items. A lawsuit, a flood claim, a one-off consultant. The test is whether it recurs under the new owner. A legal fee that shows up in two of three years is not one-time.
Non-market rent. If the seller owns the building and charges the business little or no rent, the adjustment runs the other way: a market rent is deducted, because the buyer will pay it.

Where double counting hides

Lenders ask for the business's financial statements or tax returns and the last two Notices of Assessment. Listing packages are often built from internal statements, and the two do not say the same thing. Meals are the clearest case: the CRA caps the deductible part of food, beverages and entertainment at 50% of the lesser of the amount incurred and a reasonable amount, while internal statements carry the full cost. If a listing adds back 100% of meals on top of a figure taken from a tax return, half of that add-back was never deducted. The cure is to normalize from one source, say which one, and tie the starting net income to that document before making any add-back.

Worked example

A trades business lists revenue of $1.1 million and SDE of $300,000. The seller's bridge, from internal statements: net income $140,000, owner salary $90,000, owner payroll costs $6,000, depreciation $35,000, interest $12,000, legal fees $8,000, vehicle $9,000.

The rebuild, line by line:

Owner salary and payroll costs, $96,000: supported by the T4 summary. Kept.
Depreciation, $35,000: kept, but the fixed asset register shows a truck replaced every third year at about $70,000, so the buyer's cash flow carries about $23,000 a year of replacement spending.
Interest, $12,000: $9,000 kept; the other $3,000 is finance charges inside equipment leases that stay with the business.
Legal fees, $8,000: called one-time, but the ledger shows $6,000 and $7,500 to the same firm in the two prior years. Removed.
Vehicle, $9,000: two trucks, one driven by the owner; the personal share supports about $4,000. Add-back cut to $4,000.

Rebuilt SDE: $284,000. A buyer who will not run the shop day to day also needs a manager. The federal Job Bank lists a median wage of $39.42 an hour for a construction manager in the Thompson-Okanagan region, about $82,000 a year at 2,080 hours and about $88,000 with the 2026 employer CPP and EI on top. Earnings after a market manager: about $196,000.

What that does to the deal: on the financing stack used in our BDC guide ($900,000 price, a $540,000 term loan at 8% over seven years, a $135,000 vendor note at 6% over five, $225,000 of buyer cash), debt service is about $132,000 a year. On the listing's $300,000 coverage is about 2.3x. On the rebuilt $284,000 it is about 2.1x. On the $196,000 left after a market manager it is about 1.5x, and a 16% dip in earnings takes it to the 1.25x a lender usually looks for. None of that shows on the one number in the listing.

Three things to do before you sign a letter of intent

Get the general ledger, not the summary. Every add-back should trace to an account and a document: a T4, an invoice, a lease, a court file. An add-back without a document is a negotiating position, not an adjustment.
Build the lender's version beside the seller's. Start from the tax return, add back only what is documented, deduct a market wage for any job you will not do yourself, and run the coverage test before you commit to a price.
Put the capital spending back in. SDE adds depreciation back and says nothing about the next truck. A three-year fixed asset history shows what the business spends to stay in business.

FAQ

Is SDE the same as cash flow? No. SDE is earnings before owner pay, financing and tax, and it ignores working capital and capital spending. A business can report strong SDE and still run short of cash every spring.

Will a lender accept the broker's add-backs? Lenders lend on documented earnings. Owner pay, depreciation and interest are usually accepted with support; personal expenses and one-time items are accepted when the documents prove them and removed when they do not.

Should I use an SDE multiple or an EBITDA multiple? The one that matches the earnings figure. Mixing them is one of the most common ways a buyer overpays.

Does Deal Diligence tell me what the business is worth? No. We look at the risk in the earnings behind the price: which add-backs the records support, what the lender's version of the number looks like, and what the deal depends on. The price decision stays with you.

Talk to an analyst before you sign. Deal Diligence shows a buyer how much of the price depends on earnings that may not hold, how the financing stack covers the price, and what to ask the seller before committing. Independent analysis of the risk in the deal, not a valuation and not an opinion on anyone's financial statements. Canada only. Get a ballpark quote.

Sources

General information, verified 2026-10-27. Program and lender rules change; confirm with your lender before relying on them.