Revenue and EBITDA get all the attention, and it's easy to see why. They're the two numbers on the page that feel like they answer the question "is this a good business?"

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They don't, not on their own. Two agencies can post identical revenue and identical EBITDA and be fundamentally different businesses underneath: one healthy and durable, the other quietly propped up in ways that won't survive a change in ownership.

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The difference shows up inside the P&L, not on the summary line. Here are five specific signals worth checking before a top-line number gets to decide whether you're interested.

Signal 1: Payroll as a Percentage of Revenue

Payroll is usually the single largest expense line in an agency, and its ratio to revenue tells you more about operational health than almost any other number on the page.

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A payroll-to-revenue ratio that's meaningfully lower than category norms can look like a margin advantage. Often it's something else: understaffing that's quietly eroding service quality, underpaying a team that's one better offer away from leaving, or a founder absorbing work that should be delegated to keep the ratio down. A ratio that's climbing year over year, even while revenue holds steady, usually means the business needs more people to produce the same output, which is a productivity problem hiding inside a headcount number.

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What It Tells You: Whether the team is priced and resourced sustainably, or whether the current margin depends on conditions that won't survive new ownership, low pay, high workload, or a founder doing the job of two people.

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Pro Tip: Compare the ratio to the last three years, not just the current one. A payroll ratio that's improved because the team shrank while revenue held is very different from one that improved because the business genuinely got more efficient. Ask which one happened.

Signal 2: Margin by Service Line, Not Just Blended Margin

A blended margin number can hide enormous variation underneath it. An agency at a healthy 35% overall margin might be running one service line at 55% and another at 15%, with the strong line quietly carrying the weak one.

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That matters enormously for what you're actually buying. If the low-margin service line represents a shrinking part of the business, that's a minor footnote. If it represents the growth engine the seller is pointing to as the future of the company, you're being asked to pay for growth that's structurally unprofitable at scale.

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What It Tells You: Whether the business's profitability is broad-based or concentrated in one service line that's propping up the rest, and whether the growth story the seller is telling you is a margin story or a volume story that happens to look good on the top line.

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Watch-Out: Sellers will naturally lead with their best-performing service line in conversation. Ask for margin broken out by service line specifically, not just by client, before you accept a blended number as representative of the whole business.

Signal 3: How Owner Compensation Is Actually Structured

Owner compensation is one of the most commonly adjusted lines on an agency P&L, and one of the easiest places for the real economics of the business to get obscured.

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Some owners pay themselves a market-rate salary and the P&L reflects real, replaceable labor cost. Others pay themselves minimally and take most of their value out through distributions, add-backs, or expenses run through the business, which makes EBITDA look artificially strong until you have to hire someone to actually do the work the owner was doing for free.

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What It Tells You: What it will really cost to replace the owner's labor, strategy, or client-facing role once they're gone, a cost that's often invisible in the reported financials because the owner has never had to pay themselves what that role is actually worth.

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Pro Tip: Ask what a qualified replacement for the owner's day-to-day role would cost at market rate, then compare that to what the owner currently draws as salary. The gap between those two numbers is a real cost you're about to inherit, whether or not it shows up as an add-back.

Signal 4: The Trend in Sales and Marketing Spend Relative to New Revenue

Most agency P&Ls include some line for business development, marketing, or client acquisition costs. How that number moves relative to new client revenue tells you whether growth is getting easier or harder to buy.

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An agency spending less to acquire the same amount of new revenue is building real market position, referrals compounding, reputation doing more of the work. An agency spending more each year for flat or declining new revenue is fighting harder for the same result, usually a sign that the market has gotten more competitive, the differentiation story has worn thin, or the founder's personal network, which doesn't transfer at close, has been doing more of the heavy lifting than the marketing line suggests.

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What It Tells You: Whether new business is becoming more efficient or more expensive to generate, and how much of new client acquisition has actually been running through paid channels versus the founder's personal relationships that won't be there after you close.

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Watch-Out: A very small business development line isn't automatically a good sign. It sometimes means the agency has been living almost entirely off founder referrals, a pipeline that's about to disappear the moment ownership changes.

Signal 5: One-Time Versus Recurring Expenses, Read Both Ways

Buyers are trained to scrutinize one-time revenue. Fewer buyers apply the same scrutiny to one-time expenses, and the ones that get missed usually run in the seller's favor.

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A seller's add-back list often includes one-time expenses that inflate adjusted EBITDA: a legal settlement, a bad debt write-off, an unusual consulting fee. Some of those are genuinely one-time. Others are the first instance of a cost that's likely to recur, litigation risk in a client-heavy business, technology debt that will need addressing again, a write-off pattern that shows up more than once if you look back far enough.

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What It Tells You: Whether the adjusted EBITDA number you're being handed reflects the business's real, sustainable earning power, or whether it's been cleaned up by removing costs that are more likely to be recurring than the label "one-time" suggests.

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Pro Tip: Look back further than the current add-back list. If a "one-time" legal expense or write-off shows up more than once across three years of financials, it's not one-time. It's a cost of doing business in this particular agency, and it belongs in your model, not out of it.

What These Five Signals Have in Common

None of these require anything beyond the financials you'd request in a normal diligence process. What they require is reading the P&L as a set of relationships, payroll to revenue, margin by service line, owner comp to replacement cost, marketing spend to new revenue, one-time expenses across multiple years, rather than a list of numbers to accept individually.

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A P&L that holds up under this kind of scrutiny gives you real confidence in the price you're paying. One that doesn't, isn't necessarily a reason to walk away, it's information about what needs to change in the structure: a lower price, a longer transition, an earnout tied to the specific risk you found.

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Either way, you'll know before you sign anything, which is the entire point of looking this closely in the first place.

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Want a full framework for reading agency financials before your first LOI? Get the FREE 21-Day Email Course designed for first-time agency buyers.

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Or join us live at the M&A & Exit Lab, where you'll work through real P&Ls with experienced buyers and advisors who've learned exactly what these signals mean in practice.

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The P&L is a summary. Your job is to find out what it's summarizing.

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