Income Statement / Profit & Loss (P&L)
Financial statement that presents a business's revenue, expenses, and net income over a given period. It's the first document a buyer examines when analyzing an acquisition.
Definition
The income statement (also called the statement of earnings or P&L, for “Profit & Loss”) is the financial statement that summarizes a business’s economic performance over a given period, usually 12 months. It presents total revenue, subtracts the cost of goods sold to arrive at gross margin, then deducts operating expenses, interest, and taxes to reach net income.
In French-language Quebec documentation, you’ll see état des résultats used for the same concept.
This document is one of the core financial statements, alongside the balance sheet and the cash flow statement. It’s prepared by the business’s accountant and can be audited, reviewed, or compiled depending on the level of assurance required.
Why the income statement matters in a business sale
The income statement is the first document a prospective buyer will ask to see. They want three to five consecutive years to understand the business’s trajectory: is revenue growing? Are margins stable? Is earnings predictable? These trends directly influence the valuation multiple applied and, ultimately, the price offered.
The income statement is also the starting point for calculating and then normalizing EBITDA. Normalization means removing non-recurring items and owner personal expenses to reveal the business’s true profitability. A well-prepared income statement makes this work easier and speeds up the sale process.
Any inconsistency in the income statements — missing years, changes in accounting method, significant unexplained variances — is a red flag for the buyer and their due diligence team. These anomalies can delay the transaction, reduce the price offered, or cause the sale to fall apart.
What every seller should know
- Have your income statements prepared by a chartered professional accountant (CPA) for the past three to five years before going to market — the credibility of the numbers is foundational.
- Keep accounting methods consistent year over year: an unexplained change raises questions during due diligence.
- Identify and document owner personal expenses and non-recurring items ahead of time — this speeds up the valuation process.
- Audited financial statements (rather than merely compiled) increase buyer confidence and can justify a higher price, especially for transactions above $2 million.