Business numbers, explained
Buying a store or a restaurant means reading a profit and loss statement, and the listing will use language designed to flatter it. This is the plain version of what each term really means, so you can tell a good deal from a good sales pitch, and walk into your accountant's office already knowing the questions to ask.
1. Why this guide
A business listing is a sales document. It will lead with a big, friendly number and let you assume the best about it. None of that is lying, exactly, it is just the number shown in its most flattering light. Your job is to translate it back into what the business would actually pay you, after you pay yourself for the work, and after the loan. Once you can read these terms, the companion calculator does the arithmetic in a minute.
2. The terms, in plain words
Revenue, cost of goods sold, and gross profit
Revenue is everything the business takes in. Cost of goods sold (COGS) is what the products themselves cost, the wholesale price of the drinks and snacks, or the food that goes into a dish. Gross profit is revenue minus COGS. It is the money left to run everything else. A store with big revenue but thin gross profit (think tobacco and lottery, which sell a lot for very little margin) can be far less healthy than its top line suggests.
SDE, or "cash flow", and the owner wage trap
This is the term to understand above all others. Listings advertise a figure they call cash flow, or SDE (seller's discretionary earnings). It is the profit left after operating expenses, but before the owner is paid and before any loan. It quietly assumes you will work in the business full time for free.
A listing says the business "makes $140,000." That is the profit before you take a wage. But someone has to run it, and that someone is you, doing a job you could hire a manager to do. Pay yourself a fair market wage for those hours, and the real number is what is left after that.
The same business went from a headline of $140,000 to $43,200 of real cash in your pocket, without a single number being dishonest. That is the whole point of doing this properly.
The rest of the terms
- Normalized profit and loss. The statements, adjusted to remove one time or personal items so you see the true, repeatable earnings. Your accountant does this properly.
- Debt service. Your annual loan payments, principal and interest. Business loans usually compound monthly, so the math differs a little from a mortgage.
- Free cash flow. What is genuinely left for you each year, after a fair wage and after debt service. The honest bottom line.
- Payback period. Your total cash in, divided by free cash flow. Roughly how many years until the business hands back what you put in.
- Cash on cash return. Free cash flow divided by your total cash invested, as a percent. What your own money earns in a year.
- Break even revenue. The sales level where the business exactly covers all its costs plus your wage. Below it, you are topping it up from your own pocket.
- Inventory at close and working capital. On top of the price, you usually buy the stock on the shelves at closing, and you need a cash cushion to run the place from day one. Both are real money out.
- Why unverifiable cash is excluded. Sellers sometimes hint at cash sales that never hit the books. It cannot be proven, it cannot be financed by a lender, and you should never pay a price based on it. If it is not on the statements, it does not count.
3. Benchmarks, as gentle sanity checks
These are typical ranges, and every business differs. Use them to notice when a number looks off, not as targets to hit.
| Business | Metric | Typical range |
|---|---|---|
| Restaurant | Food cost | 28 to 35% of sales |
| Restaurant | Labour | 25 to 35% of sales |
| Restaurant | Prime cost (food plus labour) | at or below about 65% |
| Restaurant | Rent and occupancy | 5 to 10% of sales |
| Restaurant | Net profit margin | roughly 3 to 9% |
| Convenience | Gross margin | near 47% average, much lower if tobacco and lottery heavy |
| Convenience | Labour | near 11% of revenue |
| Convenience | Net profit margin | healthy near 5% |
The convenience numbers explain a lot. Tobacco is the single biggest category in a typical Canadian store, and it sells at a very thin margin. Lottery pays the retailer only a small commission. So a store that lives on tobacco and lottery can have huge revenue and a slim gross margin, which is exactly why you read the margin, not the top line.
4. How to use the calculator
Open the business purchase calculator and work through it with the statements in front of you. Here is the same worked example, step by step.
- Pick the business type, say a convenience store, and enter revenue $1,200,000.
- Enter cost of goods $840,000. That leaves a gross profit of $360,000, a 30% margin, low because this store leans on tobacco.
- Enter the operating expenses from the statements. Say they total $220,000. Now the profit before your wage and any loan is $140,000, the number a listing would shout about.
- Set your market wage to $55,000, what a manager would cost. Real profit drops to $85,000.
- Enter the financing. A $300,000 loan at 7% over 10 years costs about $41,800 a year. Free cash flow is now about $43,200.
- Enter the deal costs: price $350,000, inventory $120,000, fees $15,000, working capital $20,000, less the loan, so $205,000 of your own cash goes in.
- Read the results: a payback of about 4.7 years and a cash on cash return of about 21%. Now you have an honest starting point.
5. Where the calculator stops, and the accountant starts
This tool does the deal math on the numbers you give it. It cannot tell you whether those numbers are true. That, and everything downstream, is professional work.
- The accountant verifies the statements against the tax returns and bank deposits, normalizes the one time items, and advises on structure. Buying the company's shares is very different, in tax and in risk, from buying only its assets, and that choice is theirs to guide.
- The lawyer handles the agreement, the lease assignment, the licences, and the closing.
- Then the offer. With real numbers and the right structure, you make an informed offer, not a hopeful one.
That is the team, and putting it together is most of the job. It is exactly the kind of thing to bring me in on early. I can help you read the deal and connect you with the right people before you sign anything.
A buyer sees a plaza convenience store advertised at "$140,000 a year." It looks like a salary replacement and then some. Run it honestly, pay a $55,000 wage and the loan, and it is closer to $43,000 of real cash, on $205,000 down. That might still be a fine deal for the right buyer, or a hard pass. The point is you now know which conversation to have, and you have it with an accountant, not with the listing.
Have a question while you read? I am one message away.
Enter your name and email and your PDF copy is ready to save, handy to bring to your accountant. This guide is free to read here, always. The download is just nice to have.
Thank you
Your copy is ready. Tap below to save it as a PDF, then take it to your accountant.