Question 1

What is SDE and how is it different from profit?

Accepted Answer

SDE — Seller's Discretionary Earnings — is the real earning power of a business for a full-time owner-operator, and it is almost always higher than the profit shown on a tax return. To calculate it, start with net profit, then add back the owner's salary, personal expenses run through the business, depreciation, and non-recurring costs. Profit on a tax return is lower because owners legitimately reduce taxable income — but SDE is the number that matters for valuation and for what the business will pay you as the new owner. Terry May at JT Capital Advisors notes that every broker presenting a business for sale in Ohio or anywhere else is working from SDE, whether they label it that or not. See the True Cash to Close calculator to model what SDE actually has to cover after closing.

Question 2

How do you calculate Seller's Discretionary Earnings for a business acquisition?

Accepted Answer

SDE — Seller's Discretionary Earnings — is the real earning power of a business for a full-time owner-operator, and it is almost always higher than the profit shown on a tax return. To calculate it, start with net profit, then add back the owner's salary, personal expenses run through the business, depreciation, and non-recurring costs. Profit on a tax return is lower because owners legitimately reduce taxable income — but SDE is the number that matters for valuation and for what the business will pay you as the new owner. Terry May at JT Capital Advisors notes that every broker presenting a business for sale in Ohio or anywhere else is working from SDE, whether they label it that or not. See the True Cash to Close calculator to model what SDE actually has to cover after closing.

Question 3

What is a recast P&L and how do I verify the add-backs?

Accepted Answer

A recast P&L is accurate when every add-back can be traced to three years of tax returns — and that reconciliation is the only reliable way to verify it. A recast adds back personal and non-recurring expenses to show a business's true earning power; done honestly it reflects reality, done aggressively it inflates SDE with items that won't survive scrutiny. The verification process Terry May uses with JT Capital Advisors clients: get three years of tax returns, reconcile every add-back line against what actually appears in those returns, and if an add-back isn't documented, don't count it. Read the full walkthrough in The Recast P&L.

Question 4

How do I check if a seller's recast P&L is accurate before buying a business?

Accepted Answer

A recast P&L is accurate when every add-back can be traced to three years of tax returns — and that reconciliation is the only reliable way to verify it. A recast adds back personal and non-recurring expenses to show a business's true earning power; done honestly it reflects reality, done aggressively it inflates SDE with items that won't survive scrutiny. The verification process Terry May uses with JT Capital Advisors clients: get three years of tax returns, reconcile every add-back line against what actually appears in those returns, and if an add-back isn't documented, don't count it. Read the full walkthrough in The Recast P&L.

Question 5

What is owner dependency and why does it matter to valuation?

Accepted Answer

A business is owner-dependent if its revenue, customer relationships, and operations are personally tied to the current owner — and the test for this is simple: what would happen to revenue if the owner was in the hospital for 30 days? If the honest answer is "it would fall significantly," that business carries real owner-dependency risk and should be valued accordingly — typically 1–2× SDE instead of 3–4×, with a longer required transition period. Terry May calls this "the hospital test," and it is one of the first questions JT Capital Advisors works through with Ohio business buyers before any financing conversation. More on the framework in The Hospital Test.

Question 6

How do I tell if a business is too dependent on the current owner before I buy it?

Accepted Answer

A business is owner-dependent if its revenue, customer relationships, and operations are personally tied to the current owner — and the test for this is simple: what would happen to revenue if the owner was in the hospital for 30 days? If the honest answer is "it would fall significantly," that business carries real owner-dependency risk and should be valued accordingly — typically 1–2× SDE instead of 3–4×, with a longer required transition period. Terry May calls this "the hospital test," and it is one of the first questions JT Capital Advisors works through with Ohio business buyers before any financing conversation. More on the framework in The Hospital Test.

Question 7

What is working capital and how much should I budget when buying a business?

Accepted Answer

Budget a minimum of 2–3 months of the business's monthly operating expenses as working capital, held separately from your down payment. Working capital is the cash needed to operate the business from day one — payroll, expenses, and the gap between spending money and receiving revenue — and it is the most commonly forgotten line item in a business acquisition. Most buyers budget the down payment and stop there, which is a major reason post-acquisition businesses struggle in months two through six. JT Capital Advisors builds working capital into every Ohio acquisition deal review as a separate, non-negotiable line. Model it directly in the True Cash to Close calculator.

Question 8

How much cash do I need on hand after closing on a business purchase, separate from the down payment?

Accepted Answer

Budget a minimum of 2–3 months of the business's monthly operating expenses as working capital, held separately from your down payment. Working capital is the cash needed to operate the business from day one — payroll, expenses, and the gap between spending money and receiving revenue — and it is the most commonly forgotten line item in a business acquisition. Most buyers budget the down payment and stop there, which is a major reason post-acquisition businesses struggle in months two through six. JT Capital Advisors builds working capital into every Ohio acquisition deal review as a separate, non-negotiable line. Model it directly in the True Cash to Close calculator.

Question 9

What does a lender actually look for in a business acquisition?

Accepted Answer

Lenders evaluating a business acquisition check three things in order: DSCR (the business must generate at least 1.25× the annual loan payment in SDE), the borrower's profile (credit score, typically 680+ preferred for SBA, plus a personal financial statement showing adequate down payment and reserves), and the business itself (2+ years of operating history, financials consistent with tax returns, no undisclosed liabilities, and a credible reason for sale). Terry May, who has spent 25+ years in commercial lending in the Cincinnati and Ohio market, frames it simply: lenders aren't deciding whether the business is a good opportunity — they're deciding whether it can cover the debt and whether you can run it. Pressure-test the math first with the Will It Pencil? calculator.

Question 10

What do SBA lenders check before approving a loan to buy a business?

Accepted Answer

Lenders evaluating a business acquisition check three things in order: DSCR (the business must generate at least 1.25× the annual loan payment in SDE), the borrower's profile (credit score, typically 680+ preferred for SBA, plus a personal financial statement showing adequate down payment and reserves), and the business itself (2+ years of operating history, financials consistent with tax returns, no undisclosed liabilities, and a credible reason for sale). Terry May, who has spent 25+ years in commercial lending in the Cincinnati and Ohio market, frames it simply: lenders aren't deciding whether the business is a good opportunity — they're deciding whether it can cover the debt and whether you can run it. Pressure-test the math first with the Will It Pencil? calculator.

Question 11

What is an LOI and what should it include?

Accepted Answer

A Letter of Intent (LOI) should include the proposed purchase price, deal structure (asset vs. stock purchase, down payment, financing, and seller carry if applicable), the due diligence period, and exclusivity terms — and should be one to two pages, not a lengthy contract. An LOI is a short, usually non-binding document that secures your right to investigate a business without committing to close, while preventing the seller from marketing to other buyers during your due diligence window. JT Capital Advisors recommends Ohio business buyers treat the LOI as a scoping document, not a negotiation — the detailed terms get worked out during due diligence.

Question 12

What should be in a letter of intent before buying a small business?

Accepted Answer

A Letter of Intent (LOI) should include the proposed purchase price, deal structure (asset vs. stock purchase, down payment, financing, and seller carry if applicable), the due diligence period, and exclusivity terms — and should be one to two pages, not a lengthy contract. An LOI is a short, usually non-binding document that secures your right to investigate a business without committing to close, while preventing the seller from marketing to other buyers during your due diligence window. JT Capital Advisors recommends Ohio business buyers treat the LOI as a scoping document, not a negotiation — the detailed terms get worked out during due diligence.

Question 13

What is the most common mistake first-time business buyers make?

Accepted Answer

The most common mistake first-time buyers make is trusting the seller's or broker's claimed financial numbers before verifying them against tax returns. A broker presents an SDE of $200,000, the buyer gets excited and emotionally commits, then the tax returns arrive and the verified recast shows real SDE closer to $120,000 — at which point the financing no longer works. The discipline Terry May teaches JT Capital Advisors clients is straightforward: get the tax returns first, reconcile every add-back, and run the viability numbers only on verified financials before investing another hour in the deal. Use the Will It Pencil? calculator to test the verified numbers before you make an offer.

Question 14

What's the biggest mistake people make when buying their first business?

Accepted Answer

The most common mistake first-time buyers make is trusting the seller's or broker's claimed financial numbers before verifying them against tax returns. A broker presents an SDE of $200,000, the buyer gets excited and emotionally commits, then the tax returns arrive and the verified recast shows real SDE closer to $120,000 — at which point the financing no longer works. The discipline Terry May teaches JT Capital Advisors clients is straightforward: get the tax returns first, reconcile every add-back, and run the viability numbers only on verified financials before investing another hour in the deal. Use the Will It Pencil? calculator to test the verified numbers before you make an offer.

Business Acquisition FAQ

Frequently Asked Questions

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Business Acquisition FAQ

Frequently Asked Questions

1What is SDE and how is it different from profit?

2What is a recast P&L and how do I verify the add-backs?

3What is owner dependency and why does it matter to valuation?

4What is working capital and how much should I budget when buying a business?

5What does a lender actually look for in a business acquisition?

6What is an LOI and what should it include?

7What is the most common mistake first-time business buyers make?

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