SDE Basis: Accrual, Cash, or Tax Returns?

August 20, 2025

by a searcher from Carnegie Mellon University in Denver, CO, USA

Like many others, the purchase price in my LOI is based on a multiple of SDE. In my case, I’m placing more weight on the TTM SDE since it reflects the most recent performance. I believe the LOI should specify which SDE figure we’re using, so there’s no confusion about value as we get closer to closing. Which numbers are you relying on?

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Reply by an investor
from University of Southern California in Boston, MA, USA

For the LoI, I'd name a price and note that the basis for the price is your multiple of the flavor of SDE you choose. Ideally, if SDE rises during your diligence period you would not be on the hook for more money, but could retrade if SDE declines. Increasing the purchase price as you proceed through underwriting could create headaches and delays. Sellers like to see high multiples, so maybe call out your LoI multiple as prior full year. Post close you can brag about the much lower TTM multiple that buyers like to see. At the end of the day, the lender probably isn't going to care about the multiple: they likely care much more about purchase price, equity injection, 3rd party valuation, and DSCR (which will likely be based on tax returns, as Josh mentioned).

Reply by a lender
from University of Missouri in Denver, CO, USA

Hey Jesse, hope you've been well. I can't speak for every sba lender, but I think most sba lenders will want to work from tax returns. The TTM internal financials can hurt the deal if it is showing a negative trend but rarely helps a deal much because we don't rely on them much with needing to verify the taxes. I typically like to see an adjusted EBITDA using addbacks with verification and adjusting for a buyer's salary. Typically, it works well to have a weighted average between the last few years. If there are major differences in cash to accrual they should have bridge financials that connect the two or else a QofE can help sometimes. Happy to discuss this further if you are interested.

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