Every year, we ran the same expenses through the business.
Groceries. A percentage of the home rent. Petrol. Phone bills. Anything we could legitimately claim, we claimed. Our accountant never told us not to. It reduced our taxable income and at the end of the year, that felt like a win.
What nobody told us was what it was doing to our actual profit picture. And therefore to every decision we made based on it.
When we decided to sell and the first broker gave us a valuation, the figure he worked from was our net profit after all expenses including every personal one we had been running through the books for years.
Because we had spent years making our profit look as low as possible for the tax office, it now looked low to a buyer.
I didn't understand the trap at the time. I thought we were handing over an accurate picture of a healthy business. In reality, we were handing over a tax-minimised picture. Which is a completely different thing.
I only figured this out months later when I stumbled across a YouTube video explaining the difference between SDE and EBITDA. A stranger on the internet explained in ten minutes what no broker, no accountant and no advisor had ever bothered to tell me.
If I hadn't found that video, I would have remained completely clueless. That is a dangerous position for anyone trying to run a business, let alone exit one.
Here is the reality you need to understand.
When a buyer values a small hospitality business, they don't care about revenue. They care about what the business actually earns for the owner. The real number. The one representing what a new operator could expect to take home.
That number is called Seller's Discretionary Earnings or SDE.
To find your SDE, you start with your net profit and add back certain expenses, your own salary or drawings, personal expenses run through the business, one-off non-recurring costs, and non-cash expenses like depreciation. The goal is to show the true earning power of the business, stripped of anything personal to the current owner.
But here is where the strategy breaks down.
If you have been running personal expenses through the business for years, those add-backs need to be rigorously explained and verified. A buyer's accountant will go through your books line by line. Every personal expense you want to add back requires documentation proving it was not a real operating cost.
If it cannot be verified, it does not get added back. If it does not get added back, your SDE drops. And if your SDE drops, your sale price drops with it.
In small business sales, a typical valuation multiple is two to three times SDE. That means every dollar of personal expenses run through the business without proper documentation is potentially costing you two to three dollars in sale price. The maths is working against you.
There is a second problem that is less obvious.
Buyers and their banks need to finance acquisitions. Banks only lend against proven, clean, documented earnings.
Messy books don't just reduce your valuation. They make your business harder to finance. A buyer who cannot get lending cannot complete the purchase. Your pool of potential buyers shrinks to cash buyers only, a much smaller and more ruthless group.
Clean books don't just protect your price. They help the deal get done at all.
What should you actually do about this?
Have a specific conversation with your accountant. Not your regular tax conversation. A conversation about what your books actually show versus what the business actually earns.
Tell them you want to understand your real SDE figure. What would your profit look like stripped of personal expenses, one-off costs and your own drawings? What does the business actually generate?
If you are thinking about selling in the next few years, this conversation becomes about restructuring the books to reflect that properly. But even if you are not thinking about selling, knowing your real number matters. You cannot make good decisions about the business based on a tax minimised profit figure. That number was designed to satisfy the ATO, not to tell you how the business is actually performing.
A good accountant who understands business financials will know exactly what this means. If yours looks blank when you say it, find one who does.
I learned all of this from a YouTube video.
Not from my broker. Not from my accountant. Not from anyone who was supposedly in my corner.
That is why this newsletter exists. Because the information that matters most to operators is scattered, technical, and usually only explained after it is too late to act on it.
You now know what SDE means and why it matters. You know what messy books actually cost you. You know what to do about it.
The next step is a conversation with your accountant. Have it before you need to.
Next edition: can your business survive 30 days without you? Here is how to find out honestly.
If your accountant has never mentioned SDE or sale preparation, hit reply. You are not alone and it is worth knowing.