Normalized Floor SDE Method
Underwrite variable-revenue businesses to their stabilized earnings floor, not peak years
When a business generates revenue from large, infrequent projects, its annual SDE can vary dramatically year to year. Valuing the business on a peak year inflates the purchase price beyond what stabilized operations justify and loads the buyer with debt service the business may not reliably cover. The Normalized Floor SDE Method directs buyers to gather at least three years of financial history, identify the drivers of each year's performance, separate recurring from project-based revenue, and calculate a conservative floor SDE reflecting sustainable operations. The purchase price multiple is applied to that floor figure only. Any upside from an exceptional year or the buyer's planned growth is modeled separately—never used to justify a higher base price.
- Peak-year SDE may reflect timing luck or deferred projects, not structural earnings power.
- Project-based revenue is inherently lumpy; recurring service revenue is the stable floor.
- Overpaying on peak earnings transfers all downside risk to the buyer.
- Conservative underwriting creates margin of safety; upside is a bonus, not the thesis.
- Understanding why SDE varied is as important as knowing that it varied.
- Collect multi-year SDE historyRequest at least three years of P&Ls and SDE calculations from the seller or broker. Normalize for owner add-backs consistently across all years so figures are comparable.Pro tipAsk for monthly revenue data if possible—this reveals project timing and seasonality that annual figures mask.
- Categorize revenue by stabilitySplit each year's revenue into recurring streams (service contracts, retainers, repeat consumables) and episodic streams (large installations, one-time projects). Assign SDE contribution from each bucket per year.WarningSellers often frame episodic project wins as normal recurring business; request the full customer pipeline and backlog, not just closed revenue.
- Map the causes of year-over-year SDE swingsFor each year where SDE jumped or dropped materially, document the root cause—delayed projects, new key customer, price increase, or one-time expense. This reveals whether the swing was controllable or random.Pro tipAsk the seller specifically: 'What was different this year versus last?' Their explanation tells you whether the volatility is structural or circumstantial.
- Calculate the stabilized floor SDEStrip out the effects of exceptional project years to arrive at a conservative SDE that reflects what the business reliably earns in an average or below-average operating year. This becomes your underwriting baseline.Pro tipIf multi-year data shows a clear upward trend, you may weight recent years slightly heavier; if the business is cyclical, average all years equally.
- Apply your purchase multiple to the floor SDE onlyMultiply your target deal multiple by the floor SDE—not the peak—to set your maximum offer price. This ensures debt service remains manageable even if the business reverts to its historical baseline after close.WarningAnchoring negotiations on the seller's peak-year ask is a common trap; reframe discussions around trailing three-year average SDE to ground the conversation.
- Model upside as a separate scenarioBuild a secondary projection showing what SDE and business value look like if the buyer executes growth initiatives. Use this to confirm the deal is attractive, but never use it to justify a higher floor-based purchase price.Pro tipPresenting the upside model to the seller can demonstrate your commitment to growing the business and help close favorable deal terms.
Joe Wynn found a medical equipment company with SDE of roughly $340K, $630K, and $889K across three consecutive years. The peak year resulted from projects that had been delayed from prior periods and landed simultaneously. Recognizing this, Joe treated the business as a ~$600K SDE operation rather than an $889K one. He structured his offer and debt service around the conservative floor, treating the exceptional year as potential bonus upside rather than the valuation anchor.
Extracted from Acquiring Minds, drawn from Joe Wynn's acquisition of a $2M-revenue medical equipment business where three-year SDE ranged from $340K to $889K. Joe deliberately underwrote to roughly $600K rather than the most recent peak.