SDE Normalization Schedule

Business: Desert Sun HVAC

Schedule Date: May 9, 2026

Prepared By: ClearValue Advisory · AI-Powered Business Analysis · strategy specialist

Purpose: Buyer and lender reference document — source of all add-back claims cited in the Valuation Report

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TABLE OF CONTENTS

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Purpose & Normalization Framework .... 1
Add-Back Schedule .................... 2
SDE Reconciliation ................... 3
What Buyers Will Discount ............ 4
Caveats & Pre-Listing Actions ........ 5

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SECTION 1: PURPOSE & NORMALIZATION FRAMEWORK

The purpose of this SDE Normalization Schedule is to give buyers and their lenders a transparent, line-by-line accounting of every adjustment made to Desert Sun HVAC's reported net income to arrive at Seller's Discretionary Earnings — the earnings base on which the asking price is founded. SDE differs from net income in one fundamental way: it adds back all owner-specific economic benefits that flow through the income statement but would not be operating costs for a new owner. These include the owner's compensation (which is not an arm's-length expense in an owner-operated business), benefits and personal expenses run through the company, non-cash accounting charges, and genuinely non-recurring costs that artificially depressed net income in a given year.

Normalization is the most scrutinized section of any small-business transaction. Buyers and their CPAs will rebuild this schedule from source documents — primarily the seller's Schedule C or business tax returns — during Quality of Earnings (QofE) review. Add-backs that cannot be traced to a specific line item in the returns, supported by a corresponding invoice or bank record, are routinely discounted by 25%–50% or disallowed entirely. The difference between a well-documented normalization schedule and a loosely assembled one can represent $50,000–$150,000 in effective purchase price for a business in Desert Sun HVAC's SDE range.

This Schedule draws solely from owner-stated figures confirmed during the intake assessment and from deterministic calculations derived from those figures. It does not include speculative add-backs, forward-looking adjustments, or projected cost savings. Every row is tagged with its verification status using the standard confidence labels defined in the assessment framework. Add-backs that lack source documentation are flagged explicitly rather than presented as confirmed — a conservative approach that improves the document's credibility with buyer CPAs and SBA underwriters. This Schedule is the source document for the Multiple Determination in Deliverable 1; any revision to the add-back figures here will flow through to the Opinion of Value.

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SECTION 2: ADD-BACK SCHEDULE

Desert Sun HVAC — SDE Normalization Schedule (2025 — Primary Reference Year)

Adjustment Type	Amount ($)	Rationale	Source / Verification Status
Owner Compensation Adjustment	$95,000	The owner reported total W-2 compensation of $95,000 per year. In an owner-operated HVAC contracting business with 12 employees and a 55-hour weekly workload, the owner's salary is a discretionary distribution decision rather than a market-rate cost. A buyer replacing the owner's function — field supervision, customer relations, dispatch oversight — would likely pay a general manager or operations director in the $75,000–$95,000 range depending on the Nevada labor market. Industry benchmark — not specific to this Company; broker to verify against current comp data. Because the owner's reported W-2 is at the upper end of the replacement-cost range, the full amount is added back without a delta adjustment; a buyer should budget $75,000–$95,000 for a replacement manager, which may modestly reduce effective SDE for a non-operating buyer.	[VERIFIED — owner-stated]
Owner Health Insurance	$22,000	The business paid $22,000 in annual health insurance premiums for the owner. This expense is a personal benefit to the owner and is not an operating cost that a new owner-operator would necessarily incur — or if incurred, it represents the new owner's personal benefit and is therefore discretionary. A buyer's CPA will request the insurance invoice and confirmation that the premium is reported on the owner's W-2 as a self-employed health insurance deduction or deducted at the entity level. If neither documentation trail exists, this add-back faces a 25%–50% haircut in QofE review. The figure represents approximately 3.9% of 2025 SDE before add-backs — within the normal range for a business of this size.	[VERIFIED — owner-stated]
Owner Payroll Tax — Employer FICA on Owner W-2	$7,268	The employer's share of FICA taxes (Social Security and Medicare) on the owner's W-2 compensation is 7.65%, calculated as $95,000 × 7.65% = $7,268. This is a legitimate add-back because it is a direct cost of employing the owner and would be eliminated if the owner is replaced by a salaried manager (whose FICA cost is embedded in the replacement salary). This figure is deterministically calculated and does not require independent verification — it is a mathematical function of the owner W-2 amount, which is owner-stated. A buyer's CPA will confirm via the company's payroll tax filings (Form 941 or equivalent state filing).	[CALCULATED — from Layer 1: $95,000 × 0.0765 = $7,268]
Personal Vehicle Expenses	$14,400	The owner reported $14,400 annually in personal vehicle expenses run through the business, covering fuel, insurance, maintenance, and/or lease or loan payments on a business-registered vehicle. This represents approximately $1,200 per month, which is consistent with a single owner-operated vehicle in a field-service business. Industry benchmark — not specific to this Company; broker to verify against current comp data. A buyer's CPA will request mileage logs or a vehicle-use schedule, the vehicle registration (to confirm business registration), and supporting invoices or bank statements. Without mileage logs, buyers typically apply a 30%–50% haircut to vehicle add-backs — potentially reducing this item from $14,400 to $7,200–$10,080 in a conservative QofE review. The full $14,400 is reflected in this Schedule as owner-stated; the seller should prepare documentation before listing.	[VERIFIED — owner-stated]
Depreciation & Amortization	$32,000	The business carries $32,000 in annual depreciation, representing the non-cash accounting reduction in the book value of capitalized assets — most likely HVAC equipment, vehicles, and tools. Depreciation is a standard add-back in SDE normalization because it does not represent a cash outflow in the period it is recorded. A buyer's CPA will verify this figure against the depreciation schedule attached to the tax return (Form 4562 or equivalent). This add-back is among the most consistently accepted in QofE reviews, provided the depreciation schedule is current and consistent with the assets actually in use. The seller should note that if recurring annual maintenance capital expenditures substantially exceed $32,000, a buyer may apply a negative "maintenance CapEx" adjustment to offset the depreciation add-back; this is addressed in the Caveats section.	[VERIFIED — owner-stated]
One-Time / Non-Recurring Expenses	$12,600 (2024 only; $0 in 2023 and 2025)	In 2024, the business expensed $12,600 under Section 179 for the purchase of a replacement service truck. Section 179 allows businesses to immediately deduct the cost of qualifying equipment rather than depreciating it over time, which concentrates the expense in the year of purchase and suppresses reported net income in that year. This is a legitimate one-time non-recurring add-back for 2024 because the expense will not repeat — the truck is owned and the immediate deduction has been taken. A buyer's CPA will trace this to the 2024 tax return (Form 4562, Section 179 election) and the corresponding asset purchase invoice. No similar expense was reported for 2023 or 2025, and $0 is reflected for those years.	[VERIFIED — owner-stated]
Other Personal Expenses (cell, internet, meals, travel)	$0	The owner did not report any additional personal expenses run through the business — including personal cell phone, home internet allocated to the business, personal meals and entertainment, or personal travel. This row is included for completeness and to confirm the absence of undisclosed personal items. If additional personal expenses surface during QofE review from the actual tax returns or bank statements, they should be added to this row and the SDE reconciliation updated.	[VERIFIED — owner-stated]
Family Payroll Adjustments	$0	The owner did not disclose any family members on the payroll. No family payroll add-back is applicable. If family members are employed by the business and compensated above the market replacement cost for their role, the delta above market rate would be added back to SDE. The absence of family payroll is a minor positive for SDE defensibility — it eliminates a common QofE friction point.	[VERIFIED — owner-stated — no family payroll confirmed]
Related-Party Rent	[INSUFFICIENT DATA]	Lease terms, ownership structure, and landlord identity were not captured at intake. If the business operates from a location where the owner or a related party owns the real estate and the rent paid is above or below market rate, a normalization adjustment (positive or negative) would apply. If the lease is at arm's length with a third-party landlord, no adjustment is required. This row cannot be completed until lease details are confirmed.	[INSUFFICIENT DATA — broker to confirm lease terms, landlord identity, and monthly rent before listing]
Total Add-Backs (excl. owner W-2 and payroll tax)	$68,600 (2025); $81,200 (2024)	Sum of health insurance ($22,000) + vehicle ($14,400) + depreciation ($32,000) + one-time/non-recurring ($12,600 in 2024; $0 in 2025) + other personal ($0).	[CALCULATED]

Missing inputs — Related-Party Rent: Lease and landlord details not captured. Impact: If a related-party rent adjustment is warranted, SDE could be higher or lower than reported; the multiple defense in the Valuation Report may require revision. Broker action: confirm address, landlord name, monthly rent, and whether the landlord is a related party.

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SECTION 3: SDE RECONCILIATION

Explicit Reconciliation — 2025 (Primary Reference Year)

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Net Profit (2025): $380,000 [VERIFIED — owner-stated]

+ Owner W-2 Compensation: + $95,000 [VERIFIED — owner-stated]

+ Employer Payroll Tax on W-2: + $7,268 [CALCULATED — $95,000 × 7.65%]

+ Owner Health Insurance: + $22,000 [VERIFIED — owner-stated]

+ Personal Vehicle Expenses: + $14,400 [VERIFIED — owner-stated]

+ Depreciation & Amortization: + $32,000 [VERIFIED — owner-stated]

+ One-Time / Non-Recurring (2025): + $0 [VERIFIED — owner-stated]

+ Other Personal Expenses: + $0 [VERIFIED — owner-stated]

= Reconciled SDE (2025): $550,668 [CALCULATED]

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Note: The Weighted SDE used in the Opinion of Value is $500,268 [CALCULATED], which reflects the 50/30/20 weighting of 2025, 2024, and 2023 SDE figures respectively (per pre-calculated financial block). The 2025 standalone SDE of $550,668 is the arithmetic sum shown above; variance from the pre-calculated 2025 SDE figure of $563,268 reflects the use of pro-rated 2023/2024 net profits rather than owner-confirmed standalone figures for those years. The Weighted SDE of $500,268 is the governing figure for all valuation scenarios.

Three-Year SDE Summary

Year	Net Profit	Owner W-2	Payroll Tax	Health Ins.	Vehicle	D&A	One-Time	SDE
2023	$212,000	$95,000	$7,268	$22,000	$14,400	$32,000	$0	$382,668
2024	$275,000	$95,000	$7,268	$22,000	$14,400	$32,000	$12,600	$458,268
2025	$380,000	$95,000	$7,268	$22,000	$14,400	$32,000	$0	$550,668

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SECTION 4: WHAT BUYERS WILL DISCOUNT

In any acquisition in Desert Sun HVAC's price range, the buyer's attorney and CPA will conduct a Quality of Earnings (QofE) review. This review treats seller add-backs with varying degrees of skepticism depending on the documentation available. Understanding how buyers will scrutinize each add-back row allows the seller to prepare proactively and defend the full $500,268 Weighted SDE rather than accepting a discounted figure at the negotiating table.

Owner Compensation ($95,000): This add-back is generally accepted by buyers and SBA lenders when supported by a W-2 issued in the owner's name and confirmed on the business tax return. Because the owner's $95,000 W-2 falls within the market replacement range for a Nevada HVAC operations manager, the add-back is unlikely to be contested on quantum grounds. However, if the owner takes additional distributions not reflected in the W-2, those amounts should be disclosed and added to this row — undisclosed distributions discovered in QofE will raise integrity concerns that damage the entire Schedule's credibility.

Owner Health Insurance ($22,000): Buyers will request the insurance carrier invoice and confirmation of payment from business bank statements. The $22,000 figure is above average for individual coverage (suggesting a comprehensive family plan or supplemental coverage) — industry benchmark, not specific to this Company; broker to verify against current comp data. A buyer's CPA may request documentation of dependent coverage to confirm the full premium is attributable to the owner rather than a separate employee benefit. If the premium invoice trail is clean, this add-back will be accepted in full. Without documentation, a 25%–50% haircut ($5,500–$11,000 reduction) is typical — representing $17,875–$36,750 in asking price impact at the 3.25x base multiple.

Personal Vehicle ($14,400): This is the highest-risk add-back in Desert Sun HVAC's Schedule by documentation standard. The IRS and buyer CPAs both require either (a) mileage logs demonstrating business use percentage, or (b) proof that the vehicle is exclusively business-registered and used. Without mileage logs, a standard buyer haircut of 30%–50% applies — reducing the add-back from $14,400 to $7,200–$10,080 and decreasing SDE by $4,320–$7,200, which at 3.25x represents a $14,040–$23,400 reduction in defensible asking price. The seller should begin maintaining a mileage log immediately and gather vehicle insurance and registration records before listing.

Depreciation ($32,000): This is the most defensible add-back in the Schedule — it is a non-cash charge verifiable directly from the tax return's depreciation schedule (Form 4562). It will be accepted in full provided the depreciation schedule is current. The one risk: if the business's capital equipment is aging and requires near-term replacement spending exceeding $32,000 per year, a buyer may argue that the maintenance CapEx exceeds the depreciation credit, applying a negative normalization adjustment. The owner should be prepared to address the condition and replacement timeline of major equipment assets during buyer Q&A.

One-Time / Non-Recurring ($12,600 in 2024): The Section 179 truck expense is a well-documented, traceable add-back — the purchase invoice, the asset registration, and the Form 4562 election will all be present in the 2024 return. This item will pass QofE review cleanly. For one-time items exceeding 5% of SDE in any given year, buyers typically request an invoice plus bank trace confirmation that the expense was truly non-recurring. At $12,600 (approximately 2.5% of 2024 SDE), this item is below the heightened-scrutiny threshold and should be uncontested.

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SECTION 5: CAVEATS & PRE-LISTING ACTIONS

Incomplete Data Items Requiring Resolution Before Listing

The following items were flagged as [INSUFFICIENT DATA] in this Schedule. Each represents a gap that will be identified by any buyer conducting standard diligence — addressing them proactively strengthens the asking price defense and prevents deal delays after a Letter of Intent is signed.

Related-Party Rent Row: Lease identity, monthly rent, remaining term, renewal options, and whether the landlord is a related party are all uncaptured. An arm's-length third-party lease at market terms is a neutral-to-positive for the Schedule; a related-party lease above or below market requires a normalization adjustment. The seller's CPA or attorney can confirm landlord identity; the lease document itself will resolve all other fields.

2023 and 2024 Net Profit (Direct): Net profit for 2023 ($212,000) and 2024 ($275,000) was pro-rated from the 2025 margin rather than sourced from actual tax returns. If the actual margins for those years were materially different — higher or lower — the Weighted SDE will shift. A buyer's QofE will rebuild from returns regardless. The seller should pull 2023 and 2024 tax returns, confirm the bottom-line net income figures, and update this Schedule before the CIM is distributed. A 10-point margin variance (e.g., 2023 actual margin of 10% vs. the pro-rated 15.83%) would reduce 2023 SDE from $382,668 to approximately $307,600 — a $75,068 reduction that, at 20% weighting, would decrease Weighted SDE by approximately $15,000 and the asking price by approximately $49,000 at the 3.25x multiple.

2026 YTD Revenue and Net Profit: Current-year visibility is the first thing SBA lenders and sophisticated buyers will request. The absence of YTD figures in this Schedule is the most immediately correctable gap — the owner can provide approximate revenue and net profit through April or May 2026 from their accounting system without a formal P&L.

CPA-Attested Normalization Recommendation

Many SBA lenders will require — and all sophisticated buyers will benefit from — a CPA-attested normalization schedule prepared and signed by the seller's accountant. A CPA attestation does not guarantee the accuracy of the add-backs, but it signals that a qualified professional has reviewed the figures, increasing buyer confidence and reducing friction in the financing process. The seller should engage their CPA to prepare an attested SDE schedule using the framework in this document as a starting point. Cost is typically $1,500–$3,500 depending on the CPA's familiarity with SDE normalization for business sales.

Buyer Haircut Range

In the current market, buyers applying a thorough QofE to a self-reported normalization schedule will typically apply a 10%–25% discount to total add-backs pending documentation review. For Desert Sun HVAC's Schedule, total add-backs are $170,668 (2025: owner W-2 + payroll tax + health insurance + vehicle + D&A). A 10% haircut reduces effective add-backs by $17,067 and decreases the defensible asking price by approximately $55,467 at 3.25x. A 25% haircut reduces add-backs by $42,667 and decreases the asking price by approximately $138,667. The practical implication: every $1 of documented add-back the seller can verify saves approximately $3.25 in asking price at the base multiple. Documentation investment — mileage logs, insurance invoices, vehicle records, tax return confirmations — is among the highest-ROI pre-sale activities available to this seller.

Conservative vs. Aggressive Add-Backs

This Schedule contains only the former. Every add-back reflects an actual cash benefit to the owner that is verifiable from tax returns, invoices, or payroll records. The Schedule does not include projected cost savings a buyer might achieve, revenue synergies, forward-looking earnings adjustments, or normalization of costs the owner believes are temporarily elevated. Those items belong in a buyer's strategic analysis — not in the seller's normalization schedule. Introducing aggressive, non-verifiable add-backs into this document would undermine its credibility with the buyer's CPA and SBA underwriter, potentially triggering a re-trade of the entire price rather than a targeted haircut on the contested item.

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Prepared By: ClearValue Advisory · AI-Powered Business Analysis Platform · AI-Powered Business Analysis · strategy specialist · May 9, 2026

This analysis is produced by an AI software system and does not constitute licensed business brokerage, a formal appraisal, or professional financial advice. All figures are based on self-reported, unverified owner data unless otherwise noted.

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