What Your P&L Is Trying to Tell You Before You Buy

Every seller hands you a P&L. Most buyers glance at the revenue number, nod, and move on. That’s a mistake that can cost you everything.

A P&L is not just a scorecard of what a business earned. It’s a story. And if you know how to read it, that story will tell you whether the deal in front of you is as good as it looks, better than it looks, or a disaster waiting to happen.

Here’s what to look for before you make an offer.

Revenue Trends Matter More Than Revenue Totals

A business that did $800,000 last year sounds great. But was that up from $600,000 the year before or down from $1.2 million? Direction matters as much as the number itself. Always ask for two to three years of P&Ls so you can see the trend, not just a snapshot. A business in decline can still show impressive trailing numbers while the foundation is quietly crumbling underneath.

Expense Lines Tell You How the Business Was Really Run

Look at every expense category and ask whether it makes sense for the size and type of business. Payroll as a percentage of revenue, cost of goods as a percentage of revenue, marketing spend, maintenance, utilities. If any category looks unusually low compared to industry norms ask why. Sometimes expenses are being deferred, maintenance skipped, staff underpaid, or costs run through a different entity entirely. Low expenses on paper can mean a capital problem waiting for you on day one of ownership.

One Time Items Can Inflate the Picture

Sellers love to show you their best year. What they don’t always volunteer is that their best year included a one time contract, an insurance payout, a PPP loan that hit as income, or a related party transaction that won’t repeat. Always ask what was unusual about any year that looks significantly better than the others. Normalized earnings, what the business actually produces in a typical year, is what you’re buying.

Owner Compensation is Almost Never What It Appears

In a small owner operated business the owner’s salary, or lack of one, dramatically affects what the P&L shows. Some owners pay themselves very little and run personal expenses through the business. Some pay themselves above market to reduce taxable income. You need to recast the financials with a fair market owner salary to understand what the business actually earns after replacing the owner’s labor. This is called a recasted or adjusted P&L and it’s the number that should drive your valuation.

Gross Margin is Your Early Warning System

Gross margin is revenue minus the direct cost of delivering that revenue. It tells you how efficiently the business converts sales into profit before overhead. If gross margin is shrinking year over year it means either prices aren’t keeping up with costs or the cost of delivery is rising. Either way it’s a problem that gets worse after you own it, not better.

What the P&L Can’t Tell You

Here’s the part most buyers miss. A P&L only shows you what was recorded. If bank accounts weren’t connected, if expenses were paid in cash, if revenue was deposited without being invoiced, none of that shows up. A clean looking P&L on a poorly kept set of books is not a clean business. It’s a clean looking document sitting on top of an unknown mess.

This is why underwriting a deal means going beyond the P&L. Bank statements, tax returns, reconciliation history, and a proper review of the books behind the numbers will tell you far more than the summary document the seller hands you at the first meeting.

The P&L is where the conversation starts. Not where it ends.

If you’re looking at a deal right now and want a second set of eyes on the numbers, that’s exactly what I do. I offer a free initial review. Let’s talk.

~Wendi | Fractional CFO | PVIFinancial.com

Click here to read: “The Hidden Financial Risk of Buying a Mom-and-Pop Operation”