Key Insight
Break-even tells you how much revenue can drop before the business stops covering its costs. For an acquisition, the relevant question is: does break-even leave enough cushion for debt service on top of operating costs?
The Formula
Break-Even Revenue = Fixed Costs ÷ Gross Margin %
For a business with $400,000 in annual fixed costs and a 55% gross margin: Break-Even = $400,000 ÷ 0.55 = $727,273 in annual revenue
Below that revenue level, the business loses money. Above it, each dollar of revenue contributes 55 cents toward profit.
Fixed vs. Variable Costs
Fixed costs: Rent, salaried employees, insurance, software subscriptions, debt service — don't change with revenue volume.
Variable costs: Direct labor (hourly), materials, commissions, shipping — scale proportionally with revenue.
The break-even formula works at the contribution margin level: revenue minus variable costs (i.e., gross margin) must cover fixed costs.
Acquisition-Specific Application
Downside buffer: If a business with $1.2M in revenue has a break-even of $900K, there's a 25% revenue decline buffer before the business goes cash-flow negative. That cushion matters when pricing risk.
Debt service break-even: For SBA-financed deals, calculate the break-even inclusive of debt service payments. If annual debt service is $120K, add it to the fixed cost base and recalculate. This is the acquisition-adjusted break-even.
Margin of safety: (Current Revenue − Break-Even Revenue) ÷ Current Revenue = the percentage by which revenue can fall before losses occur. Higher is safer.
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