Small business financials are not audited, and they are usually prepared to minimize tax rather than to inform a buyer. Both facts mean the numbers you are shown need translating before they mean anything.
The add-back conversation
Sellers "add back" personal or one-time expenses to show what the business really earns for an owner. Some add-backs are legitimate — the owner’s car, a one-off legal bill, a salary above market. Others are quietly load-bearing costs dressed up as optional.
Legitimate vs suspicious
Fine: Owner's personal vehicle, one-time legal settlement,
owner salary above what a manager would cost
Suspicious: "Marketing we did not need" (revenue depends on it)
"One-time" repairs that appear in all three years
Unpaid family labor that you will have to hire for
Where to look
- Three years of tax returns, not just the P&L the broker prepared.
- Bank statements against reported revenue, month by month.
- Revenue by customer, to see concentration the summary hides.
- The trend inside the year — a business declining since spring can still show a fine annual total.
This is the point to bring in an accountant who has reviewed acquisitions before. It is a few thousand dollars against a purchase that will define your next five years, and it is the cheapest insurance in the process.
Try it
Take any listing with financials and rebuild the earnings yourself: start at tax-return profit, add back only what you would genuinely not spend, and subtract a market salary for whoever does the owner’s job. That number is what you are buying.