The Numbers Primer

1. Gross profit vs. gross margin

These get used interchangeably and they shouldn't be — one is a dollar figure, the other is a percentage.

Worked example. A shop does $500,000 in revenue with $325,000 in COGS (parts, materials, direct labor on the job):

Saying "our margin is $175,000" is the tell that these are getting confused — margin is always a percentage. Profit is the dollar figure it's a percentage of.

2. Markup vs. margin

This is the trap that quietly erodes profitability in a lot of shops, because the two numbers are calculated off different bases for the exact same transaction.

Worked example. A part costs $100. Price it at a 50% markup:

Common markup-to-margin conversions, so the gap is visible at a glance:

3. EBITDA

Earnings Before Interest, Taxes, Depreciation, and Amortization. It strips out how a business is financed and taxed, and how its equipment is depreciated on paper, to show what the operations themselves generate.

It's the number buyers, lenders, and valuation multiples ("4x EBITDA") are built around, because it lets two businesses with different debt loads or tax situations be compared on the same basis.

4. Adjusted EBITDA

Raw EBITDA still carries whatever is specific to the current owner — an above-market owner salary, a one-time legal bill, a truck bought for a family member. Adjusted EBITDA adds those back to show the business's real, ongoing earning power to someone who isn't the current owner.

Worked example. A shop reports $400,000 in EBITDA. The owner pays themselves $300,000/year, but a GM doing the same job would cost $150,000 in the market. There was also a one-time $50,000 legal settlement this year:

*Bar heights are illustrative, not to a shared dollar scale — EBITDA here reflects operating expenses beyond COGS that gross profit doesn't show.

5. Quality of earnings

Quality of earnings (QoE) isn't a formula — it's a diligence process, usually run by a third-party accounting firm during a sale, that tests whether the adjusted EBITDA a seller is presenting actually holds up.

A QoE review typically checks:

• Whether revenue is recognized at the right time (jobs booked but not yet completed, deposits treated as revenue too early)
• Customer concentration — how much of the revenue depends on one or two accounts that could walk
• Whether every add-back in the adjusted EBITDA is real, one-time, and documented — not just asserted
• Working capital normalization — whether the business needs unusual cash on hand to operate day to day

This is where a lot of sellers get a rude surprise: an adjusted EBITDA number they've quoted for years gets renegotiated down in diligence because the add-backs weren't documented well enough to survive scrutiny. The practical takeaway is to keep the paperwork for every add-back as it happens, not to reconstruct it under deadline once a buyer is already at the table.

This is operational education, not legal, accounting, tax, or investment advice. See the disclaimer.