Anonymised, illustrative composite. A founder who never paid himself a salary handed a buyer's lender a normalisation problem that ran in the opposite direction from every other add-back on the file.
At a glance
A family-run distribution business came to market with reported seller's discretionary earnings of $680,000. The founder had run the company for five years without drawing a salary, taking his return entirely through dividends and reinvestment, and the company's financial statements reflected that: no management wage line at all. See the seller's discretionary earnings glossary entry for how that figure is normally built.
Ordinary SDE normalization adds back an owner's salary on the theory that a new owner will pay themselves differently than the old one did — the standard adjustment runs in one direction, toward higher earnings. This file needed the opposite adjustment. With no salary on the books to add back, the reported $680,000 overstated what the business could sustainably earn under a new owner who would actually need to pay someone to run it day to day. The lender's underwriting team flagged this on first review: a business run for five years on unpaid founder labour is not the same business once that labour has to be replaced and compensated at a market rate.
The lender imputed a $145,000 replacement general-manager salary — a deal-specific estimate the underwriting file treated as a scenario input for this business's size and complexity, not a published benchmark — and subtracted it from the reported figure rather than adding anything back. Normalized SDE fell to $535,000. Against deavo's published financing guidance, which sets debt service coverage on an SDE basis at roughly 1.25 times, that changed the maximum serviceable annual debt service from about $544,000 on the reported number to about $428,000 on the normalized one — a swing of roughly $116,000 a year in what the business could support, before a single dollar of the purchase price was discussed.
There is no statute or regulator setting this adjustment; it is a lending judgment. Deavo's own published guidance treats seller's discretionary earnings and EBITDA as different underwriting bases with different targets — at least 1.25x on SDE, at least 1.30x on EBITDA — and, importantly, its bands are keyed to deal size, not to the earnings figure: SDE underwriting on deals of roughly $200,000 to $1,000,000, and, as the page puts it, “from roughly $1M up, lenders switch to EBITDA.” See deavo's financing guidance for the bands themselves, which it labels “Illustrative estimate only — not a financing offer, pre-approval, or financial, legal or investment advice.” This lender underwrote the file on the SDE convention the seller's own presentation had used, and the 1.25x target is the floor that convention carries — the imputed-salary deduction is not part of deavo's own published mechanics, it is the specific lender's response to a fact pattern the standard add-back process was never built to handle.
The purchase price was renegotiated down from a multiple applied to the reported $680,000 to the same multiple applied to the normalized $535,000, and the financing was structured against the lower serviceable-debt figure from the start rather than discovered as a shortfall during underwriting. For a related add-back dispute over documentation rather than direction, see personal vehicles running through the company, and for the underlying ratio doing the work here, the debt service coverage ratio glossary entry.
A buyer who financed against the reported $680,000 without catching the missing-salary problem would have structured debt service the business could not actually sustain once a real manager's wage came out of cash flow — a gap of roughly $116,000 a year in serviceable capacity that would have surfaced as a covenant problem within the first year, not as a pricing conversation before closing. Catching it in underwriting cost a renegotiated price and a slower closing; missing it would have cost a distressed refinancing or worse once the new owner's own management wage started coming out of the same cash flow the seller never drew from.
The tell was the missing line item itself: five consecutive years with no owner salary recorded anywhere in the financial statements. A reported SDE figure that has never had to absorb a market-rate management cost, because the owner simply never took one, is not showing what the business can sustainably pay a new owner — it is showing what the business paid when nobody was drawing a wage at all. Any diligence review should treat a nil owner-compensation line as a normalization flag in its own right, not just an absence of one add-back among many.
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