Break-even point
The break-even point is the level of sales where a business’s total revenue equals its total expenses. It shows how much a business must sell before it earns a profit, and it moves when costs or selling prices change.
A buyer meets the break-even point when testing how much sales a business needs just to cover its costs. BDC defines it as the level of sales where total revenue equals total expenses, and says that before any profit is earned, the break-even point must be reached. For the wider financial review, see what buyers look for in your financial statements.
What goes into it
BDC describes fixed costs as expenses that do not change with the amount of goods produced or services provided, and variable costs as expenses that change with it. It says a service business can use hours in place of units, and that a break-even analysis shows how the point shifts when something like the selling price changes. BDC also points to a sensitivity analysis to test different variables; see sensitivity analysis.
What to check or ask
- Which of the seller’s costs are fixed and which vary with sales?
- Does the cost list include the owner’s pay, and would a new owner’s pay differ?
- Would the buyer’s loan payments or new lease terms raise the fixed costs?
- How far would sales have to fall before the business stopped covering its costs?
Sources
This definition is checked against primary sources. Links were last confirmed on the dates shown.
- 01Business Development Bank of CanadaGovernmentWhat is the break-even point?
- 02Business Development Bank of CanadaGovernmentWhat are fixed costs?
- 03Business Development Bank of CanadaGovernmentWhat are variable costs?
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