Buyer's Guide · Buying a business
How to read a P&L when you're buying a business
A profit-and-loss statement shows revenue minus expenses over a period. But when you're buying a business, you read it backwards: instead of asking "how much did it make?", ask "can I verify every line, and what is the owner hiding?" Confirm revenue against the tax returns and bank deposits, walk each expense down against industry benchmarks, separate the legitimate owner add-backs from the padding, and rebuild the real owner earnings (SDE) yourself. The numbers a seller volunteers are a starting point, never the answer.
First, the anatomy of a P&L
A profit-and-loss statement (also called an income statement) lists what a business earned and spent over a period. Top to bottom:
| Revenue (top line) | Everything the business took in. The most-inflated line on a seller's P&L. |
|---|---|
| COGS | Cost of goods sold: what the inventory or fuel cost. Revenue minus COGS = gross profit. |
| Gross profit | What's left to run the business with. Compare it to industry margin benchmarks. |
| Operating expenses | Rent, labor, utilities, insurance, repairs. Where add-backs hide. |
| Net income (bottom line) | What's left after everything, but NOT what you'll take home as an owner. |
The buyer's mindset: read it to verify, not to admire
A seller's P&L is a sales document. It was assembled to make the business look worth buying, and it can be presented however the seller likes. There's no rule that a P&L has to match reality. So you don't read it asking “how much did this make?” You read it asking “can I prove every line, and what's missing?” The four tests below are how you do that.
The four cross-checks
Test 1: Revenue vs the tax return
Put the P&L's revenue next to the gross receipts on the federal tax return for the same year. Sellers inflate spreadsheets; they rarely inflate what they reported to the IRS. A P&L that runs well above the tax return is the single loudest warning sign there is.
Test 2: Revenue vs the bank statements
Real revenue lands in a bank account. Tie the monthly deposits to the monthly revenue on the P&L. Cash-heavy businesses are where this matters most: revenue that can't be traced to a deposit can't be verified, and can't be financed.
Test 3: Every expense vs a benchmark
Each expense category has a normal range as a percentage of revenue. A line far below the benchmark usually means an expense was removed to fatten the profit; a line far above means either a real problem or a personal cost run through the business.
Test 4: Three years, not one
One good year is a snapshot; three years is a trend. Ask for three years of P&Ls and look for the story: steady, growing, or a suspicious jump right before the sale. The year a business goes up for sale is the year its books look their best.
Benchmark each expense (gas-station example)
Test 3 needs something to compare against. Here are the normal ranges for a gas station, as a share of revenue. A P&L that sits wildly outside them isn't automatically fraud, but it is automatically a question:
| COGS (fuel + merchandise) | 75 to 85% of revenue |
|---|---|
| Rent / lease | 3 to 6% of revenue |
| Labor (excluding you) | 4 to 8% of revenue |
| Utilities | 1 to 3% of revenue |
| EBITDA | 5 to 12% of revenue |
Buying a different business type? The benchmarks shift: a convenience store with no fuel runs very different margins. Start from your vertical: convenience-store valuation or gas-station valuation.
The bottom line isn't your line
The number a seller points to is usually net income, the bottom line. But net income is buried under the current owner's salary and their add-backs, so it understates what an owner-operator actually takes home. What you're really buying is SDE (net income plus the owner's salary and legitimate add-backs), and that, not net income, is what the price is built on.
SDE and EBITDA get mixed up constantly, and the confusion can move a price by six figures. EBITDA vs SDE, explained →
Let BizScore read the P&L for you
Everything above is the manual version. Upload the seller's P&L, tax returns, and bank statements, and BizScore ties the revenue to the returns, benchmarks every expense, separates real add-backs from padding, and computes the true SDE, each finding backed by the exact document it came from.
Frequently asked
- How do I read a P&L when buying a business?
- Read it to verify, not to admire. Confirm the revenue against the tax returns and bank deposits, compare each expense to its industry benchmark as a percentage of revenue, separate legitimate owner add-backs from padding, and rebuild the real owner earnings (SDE) yourself. Always use three years, not one.
- What's the difference between a P&L and a tax return?
- A P&L is prepared by the seller (or their bookkeeper) and can be presented however they like. A tax return was filed with the IRS, where overstating income costs the owner money, so it's far harder to inflate. When the two disagree, the tax return is closer to the truth.
- What are add-backs on a P&L?
- Add-backs are expenses added back to profit because they won't carry over to you: the owner's salary, personal expenses run through the business, and genuine one-time costs. Legitimate add-backs are fair; padded or unprovable ones inflate the earnings, and therefore the price.
- Why isn't net income what I'll earn?
- Net income is buried under the current owner's salary and their add-backs, so it understates an owner-operator's real take-home. What you'll actually earn is SDE: net income plus the owner's salary and legitimate add-backs. That's what the price is built on.
About this guide
BizScore is built by first-time business buyers — people who watched someone close to them lose their life savings on a deal that looked clean on a spreadsheet and fell apart in the documents the seller never volunteered. That experience is why these guides exist, and why every BizScore report cites the exact document behind each finding.
Where the numbers come from: the benchmark ranges in our guides — SDE multiples, expense ratios, typical timelines — are widely-used industry rules of thumb, cross-checked against the analytical benchmarks BizScore applies inside its reports. Dollar figures such as a ~$15,000 quality-of-earnings review or a $5,000 deal attorney are representative of what buyers typically pay, not quotes; actual costs and multiples vary by deal. We review these figures periodically — last updated June 2026.
BizScore is an information service — think of it as a Carfax for a small business — not a CPA, an attorney, or financial advice. Use it to decide where to spend your professional dollars, and bring in a qualified professional before you sign anything.
This guide is general education, not a formal business appraisal or financial, legal, or tax advice. Every deal is different. Verify against the actual documents and talk to a qualified professional before you sign anything.