If you caught this week's video, you know the core idea: revenue is vanity, and SDE — the real, normalized owner earnings — is what tells you what a business is actually worth. Here's the part the video only touched, and it's the part that stops deals cold: that same number decides whether a bank will finance the purchase at all.
Here's the thing to burn in: a lender does not care about your revenue. At all. "It does a million a year" means nothing to them. They look at the earnings — the SDE you rebuilt and stress-tested — and they ask one question: after the new owner pays themselves a fair wage to actually run this thing, does what's left cover the loan payment, with room to spare?
That's three demands on one number, all at once:
Pay the loan. The debt payment on whatever you borrowed to buy it.
Pay you. You have to eat while you run the place — a market wage for your role comes out first, not last.
Leave a cushion. Lenders don't want the earnings to just barely cover the payment; they want margin for a soft quarter. The earnings have to clear the payment with room left over.
If the SDE can't do all three, the deal isn't financeable — no matter how big the top line looks. And this is exactly where buyers get blindsided: they fall in love with the revenue, agree on a price, walk into the bank proud of the sales number — and get told no. The bank was never looking at revenue.
So before you ever get to a lender, run their math yourself. Take the real SDE — the honest one, after you've thrown out the padded add-backs — subtract a market wage for your role, and see whether what's left comfortably covers the debt payment on the asking price. If it's tight, the price is too high or the earnings are too thin, and the bank will see it before you do. If there's healthy room, you've got a deal that actually funds.
Revenue gets you in the door. SDE decides whether you walk out with the keys. Rebuild it honestly — because the bank will.
See you next week,
Eddie
The Small Business Digest — buy the right business, at the right price, with your eyes open.
(Educational content based on generalized experience — not financial, legal, or investment advice.)