How do you tell a good deal from a bad deal?

What are the tests, in order?

Run these in sequence. Each one is cheap compared with the next stage of diligence, and any one can end the deal.

1. Are the earnings real? Audit the add-backs. Tie the numbers to tax returns and bank statements.
2. SDE minus a manager's salary. Subtract what it would cost to hire someone to do the owner's job. What is left is the profit you are buying as an owner, not a job you are buying.
3. Debt service coverage. Divide cash flow after that salary by annual debt payments. The SBA minimum for an Initial Acquisition is 1.25x, measured on historical or adjusted historical cash flow. Projections cannot be used.
4. Price against the market. Compare the price with the industry SDE multiple. BizBuySell averages for 2021 to Q1 2026: car wash 4.99x, laundromat 3.65x, e-commerce 3.43x, HVAC 2.79x, restaurants 2.15x, hair salons 2.04x.
5. Cash left over. After the salary and debt service, is there enough for capital spending, taxes and a bad year?
6. The risks the numbers do not show. Owner dependence, customer concentration, a short lease, declining revenue, licensing.

Why subtract a manager's salary?

SDE adds back one owner's salary. That makes the business look like it produces more profit than it does. If you plan to run it yourself, you still need to be paid. If you plan to hire a manager, you need to pay them. Either way, that cost comes out before the bank or investors see a dollar.

Use the local market cost of a capable general manager, including benefits. For reference, self-funded searchers commonly pay themselves $100,000 to $150,000. The SDE-minus-salary figure is close to what larger buyers call EBITDA. Dividing the price by it gives you a multiple you can compare across deals.

Worked example: two deals at the same price

Both businesses are listed at $1,000,000. Shared assumptions, all illustrative except the SBA rules and rate cap:

• Total project costs: $1,000,000 price + $60,000 working capital + $40,000 fees and closing costs = $1,100,000.
• Equity injection at 10%: $110,000. SBA loan: $1,100,000 − $110,000 = $990,000.
• Rate 10% (prime of 7% plus 3%, the maximum variable rate for loans over $350,000 as of September 2026; check current prime), 10-year amortization. Monthly payment $13,082.92. Annual debt service $156,995.
• Manager's salary including benefits: $100,000.

Deal A: SDE of $400,000

1. Price ÷ SDE: $1,000,000 ÷ $400,000 = 2.5x. Close to the 2.57x all-sector average.
2. SDE minus manager: $400,000 − $100,000 = $300,000.
3. Price ÷ that figure: $1,000,000 ÷ $300,000 = 3.33x.
4. Coverage: $300,000 ÷ $156,995 = 1.91x. Passes 1.25x.
5. Left after debt service: $300,000 − $156,995 = $143,005, before taxes and capital spending.

Deal B: SDE of $250,000

1. Price ÷ SDE: $1,000,000 ÷ $250,000 = 4.0x. Well above most industry averages.
2. SDE minus manager: $250,000 − $100,000 = $150,000.
3. Price ÷ that figure: $1,000,000 ÷ $150,000 = 6.67x.
4. Coverage: $150,000 ÷ $156,995 = 0.96x. Fails. The business cannot pay its debt after paying a manager.
5. Left after debt service: $150,000 − $156,995 = −$6,995.

The break-even line for this financing: $156,995 × 1.25 = $196,244 of cash flow after the manager, or $296,244 of SDE. Below that, the deal fails the SBA's 1.25x test at this price on these terms. Deal B is not a deal at $1,000,000. It might be a deal at a lower price, but only after its earnings are verified.

What makes a deal bad even when the numbers pass?

• The owner is the business. Customers buy from the owner personally, or the owner holds the only license.
• A few customers dominate revenue. Losing one changes the math above.
• The lease is short or not assignable. A location business without a secure lease is a business with an end date.
• Revenue is falling. Historical cash flow overstates the future.
• Capital spending is deferred. Old trucks and equipment are a cost you inherit on day one.
• The appraisal comes in low. SBA debt is capped at the appraised value. Any gap comes from your cash.

Where these numbers come from: SBA coverage, injection and valuation rules are from SOP 50 10 8.1 as summarized by Beancount and Cantrell Firm. The rate cap is from NerdWallet. Industry multiples are from Beancount's analysis of BizBuySell data. Searcher salaries are from Searchfunder. Deal figures are illustrative; payments are standard amortization arithmetic. SOP 50 10 8.1 applies to loans numbered on or after October 1, 2026; lender practice under it is still settling and these are secondary summaries, so confirm current terms with your SBA lender.

Related questions

Is a low multiple always a good deal?

No. Low multiples often reflect risk: owner dependence, decline or an industry buyers avoid. Restaurants average 2.15x SDE in BizBuySell data for a reason. Run the same tests regardless of the multiple.

What coverage ratio should I aim for, not just accept?

1.25x is the SBA floor for an Initial Acquisition, not a target. A thin margin above it leaves little room for a bad quarter. Decide your own cushion before you see the deal, and hold to it.

Does the test change if I already own a business?

The SBA's Business Expansion category uses 1.15x instead of 1.25x. That makes more deals financeable. It does not make them better, so keep the same manager-salary test.

Should I count the seller note in coverage?

Yes, unless it is on full standby. A seller note not on standby must be included in coverage at a maximum 10-year amortization.

What comes next

Before you compare a price with a multiple, confirm what the price buys. See whether the asking price includes inventory, receivables and working capital.

Related articles

• Which add-backs are legitimate, and which should you question?
• How much should I pay for a business?
• What is the difference between SDE and EBITDA?
• How much will a bank lend to buy a business?
• How do you build a holding company for acquisitions?

Meraki Dealmakers is a service of Meraki Partners, LLC, an advisory firm. It is not a broker-dealer, investment adviser, business broker, law firm or accounting firm. This article is general information, not legal, tax or investment advice.