SOP #44 — Auditing Owner Add-Backs, Recovered $45k of Phantom Profit

SOP #44 — Auditing Owner Add-Backs, Recovered $45k of Phantom Profit

Agency listed at $310k on $103k SDE (seller's discretionary earnings — profit plus owner perks added back). Add-backs were inflated. Procedure:

1. List every add-back line item — demand a receipt or invoice for each. Pass if 100% are documented.
2. Separate true one-time costs from recurring disguised-as-one-time. Result: a $19k 'one-time' contractor was a monthly retainer.
3. Re-add only owner salary replaceable by a hire at market rate. Result: founder paid himself nothing; a replacement manager costs $52k/yr.
4. Recompute real SDE for a hands-off buyer.

Outcome: real SDE was $58k, not $103k. Repriced at 3.2x to $186k. The $45k gap in 'profit' was buyer-funded fantasy.

Save this — run it every deal.