SDE calculation from Tax Return vs. from P&L?

September 05, 2025

by a searcher from Baruch College-The City University of New York - The Zicklin School of Business in Edison, NJ, USA

I have a general question on a business I am underwriting: The SDE calculated from the tax return is lower by $200k from the SDE calculated from P&L. Is that normal? What could the reasons for this happening, any examples?

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Reply by a searcher
from Columbia University in Fairfax, VA, USA

Very common in the SMB world. One way to think about it: tax returns are generally prepared to minimize taxable income, P&Ls are often (not always) presented to maximize earnings for a buyer. Here's a bit of a roadmap I'd suggest: First, confirm if there's a difference in the accounting (accrual on the P&L vs. cash-based on the tax returns). Timing differences in A/R, prepaids, and deposits can swing revenue and NOI. From there, start with the biggest drivers: revenue and depreciation / interest. Those two alone often explain much of the gap. Once you reconcile those, I'd continue pulling on the thread by digging into: > Major expense buckets (COGS, payroll, rent, repairs, maintenance, etc)... look for items expensed differently (e.g., CapEx vs. repairs) > Isolate and dig into one-time / discretionary expenses... these are often treated more aggressively on P&Ls than tax returns > Interest & building costs... since the business owns real estate, confirm how mortgage interest, property taxes, and building depreciation are flowing through each version Ultimately, you’ll want to validate cash inflows/outflows against bank statements (a big part of what a QoE will do) to see which version reflects the business's true earning power. Hope this helps.

Reply by a searcher
from University of Toledo in Shaker Heights, OH, USA

All good points shared; he's my slightly meta statement to offer. "As an investor in SMB or LMM assets, your core objective is to make a return in cash." A over simplification, yes. But this drives my constant statements regarding focusing on unlevered free cash flow ("UFCF") inclusive of normalization over time. (look back period). Next point, the CTR drives the leverage portion of the consideration paid to the seller, not the transaction value. And yes, cash vs accrual based reports will differ. Cheers.

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