What a deal packet is actually telling you

What is usually in the package, and what each part proves

After an enquiry and a confidentiality agreement, a first package tends to contain some mixture of four things, and they are not equally strong evidence.

A summary or memorandum. Written by the seller's side to be persuasive. Evidence of what the seller wants you to focus on, which is genuinely useful information about the seller.

Financial statements, often two or three years, often prepared internally. Evidence of what the business reports. Whether they reconcile to tax filings and bank activity is a separate question and not one this document answers.

An adjusted earnings schedule, sometimes called a normalisation or an add-back schedule. This is the most consequential page in the package and the one most often read as a fact. It is a set of proposals about which costs do not belong to the business.

Supporting detail. Equipment lists, lease summaries, customer counts, staff schedules. Evidence of the operating shape, and often where the real story shows up first, because this is the part written to be read by an operator rather than by a buyer. It still has to be walked item by item. A single total for fixtures and equipment tells you nothing about the condition of any of it, and condition is what you are buying.

Reported profit is not buyer earnings

Almost every confusion at this stage comes from two people using one word for different quantities. The business reports a profit. The seller quotes an earnings figure. A buyer wants to know what the business will produce for them. Those are three numbers and they usually differ.

The reported profit is what the statements show after everything the current owner ran through the business, including whatever the owner chose to pay themselves and whatever personal costs sat in there.

The quoted earnings figure is usually that profit with a list of things added back, on the argument that a new owner would not incur them. Whether that argument holds is the entire question.

What you would receive is that figure, minus the cost of anything the seller was doing unpaid that you will have to pay for, minus the cost of borrowing whatever you borrowed, minus whatever the business needs reinvested to keep producing at the same level. Those three subtractions are where first-time buyers are most often surprised.

An add-back is a claim, and claims can be sorted

Read the adjustment schedule with one question per line: will this cost genuinely be absent after I own it. Three answers are possible and they are worth separating.

Sometimes yes, clearly. A one-off legal cost from a matter that has concluded. An expense that belonged to something the seller has since sold.

Sometimes no. An owner's salary added back in full when the owner works forty hours a week doing something you will either do yourself or pay somebody to do. Removing it does not make the work disappear, it moves the cost onto you and off the page.

And often it depends, which is the interesting category. A vehicle, a phone, a family member on payroll, a marketing spend that stopped. Each is a question about how the business will actually be run rather than a question about accounting.

Sort every line into those three. The total of the third category is the size of the conversation you still need to have, and it is a far more useful number than the adjusted figure at the bottom of the page.

A worked illustration of the shape

These numbers are illustrative and invented to show the arithmetic. They describe no real business and are not a typical or expected result for anybody.

Suppose reported profit is 90 thousand dollars, and the schedule adds back 60 thousand of owner salary, 12 thousand of vehicle costs and 8 thousand described as one-off, giving a quoted figure of 170 thousand.

Now suppose the owner works full time in the business and you would need to replace that with a manager at 55 thousand. Suppose the vehicle is genuinely used for deliveries and stays a real cost. Suppose the one-off item does check out. Work it through rather than taking a total. The 60 of owner salary comes back but 55 goes straight out again to the manager, so that add-back is worth 5 to you and not 60. The 12 of vehicle cost is not an add-back at all, because the expense continues after you own it. The 8 survives. So 90 plus 5 plus 8 is 103, and it moves again once borrowing costs and reinvestment come out.

The 170 was not dishonest. It answered a different question from the one you are asking, and the gap between the two questions is what this stage of reading is for.

Price, earnings and terms are three separate arguments

It is easy to spend all your attention on whether the asking price is right. It is usually the least informative of the three.

The asking price is a decision made by the seller and the broker before you appeared. The earnings are a claim about the business. The terms are how risk is shared between you and the seller after closing, and they can change a deal more than a price adjustment does.

A seller who will not move on price may move on structure, on what stays behind, on how long they remain available, or on what happens if the largest customer leaves in the first year. Reading the package with all three in view keeps you from concluding too early that a deal does not work.

Keep a column for what you do not know

The habit that separates a useful read from an anxious one is keeping unknowns visible instead of resolving them with an assumption.

Use three columns as you read. What the package states. What you can see is missing. And what you would need to see in order to believe the first column. Nothing in the third column is an accusation. It is a request list, and it is what turns a reading session into the next conversation.

This also protects you from the opposite failure, which is treating an absence as a red flag. A first package often omits things for ordinary reasons, including that the seller has not been asked. An unanswered question becomes a finding only after it has been asked and not answered.

The read ends in a question list, not a verdict

You are not deciding whether to buy. You are deciding whether this is worth the next stage, and what has to be true for it to survive that stage.

So finish with two short lists. The three things that would have to be false for this to stop being interesting. And the three questions whose answers you cannot get anywhere except from the seller.

A buyer who arrives at the next conversation with those six lines is in a different position from one who arrives having read the package and formed an impression, and the difference shows in what gets sent afterwards.