A quick overview on how a business broker, M&A advisor or Investment Banker arrives at the profitability of a business.

If you are serious about buying a business, it is to your benefit to become very comfortable with the income statement (P&L) of the business that you are looking to buy.

The last thing you'll want to learn upon closing on your new business is that the business makes less than you thought it did because the seller added back expenses that are in fact recurring.

Generally speaking, expenses that are added back on the income statement include:

-Non-recurring fees (one-time legal fees, one-time web development fees, etc.) Note that for online businesses, content creation fees are typically seen as non-recurring.
-Salary the owner(s) takes for him/herself.
-Rent the owner pays him/herself
-Cell phone bill, car payment, insurance etc. that the business owner had the business pay for.
-One time investments (if the business bought it's own building, the down payment will be shown as an addback because it is not recurring.)

There is often-times some disagreement among buyer, seller and broker what justified add-backs are, this is why it is important for buyers to seek clarification on them.

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