Correct adjusted net profit, how to calculate it.

Correct adjusted net profit, how to calculate it.

How do you arrive at the correct adjusted net profit from company accounts?

The correct adjusted net profit is the valuer’s assessment of the actual net profit of a currently trading operational entity. It is the net profit that is shown from the accounts once adjustments for abnormal and non-recurring expenditure, finance costs, rent (where appropriate) and depreciation relating to the property itself have been made. It gives the valuer guidance on assessing the fair maintainable operating profit (FMOP, more details here) which is used to calculate the companies value.

The difference between the net profit and adjusted net profit is the costs that are personal to the way in which the owner has chosen to run the company and accounts. To create the correct adjusted net profit all of the current owners expenses must be deducted.

For example:

 

Turnover£275,000
Gross Profit£151,250
Wages£50,000
Rent Payable (Office)£10,000
Rates£3,000
Directors Remuneration£15,000
Loan Interest£6,000
Depreciation£5,000
Other£50,000
Net Profit£12,250
Add Backs
Rent payable£10,000
Managers Wage£20,000
Loan Interest£6,000
Directors Remuneration£15,000
Adjusted Net Profit£63,250

 

The rent payable is a separate office rented by the owner, the managers wage is paid to the owner, the loan interest is from the loan taken by the owner to buy the property and business, the directors’ remuneration taken by the owner for personal use. None of these costs are costs of the business so they are added back into the net profit to create a more accurate representation of profitability.

A typical valuation will look at the historical accounting figures and consider current management information. Calculation of adjusted net profit would also take into account any one-off or capital investments and spread these over an appropriate timescale.

Next month: We take a look at the location of your business.

For more articles like this, go to our Articles page (or click here for our previous article), and also consider signing up to our Newsletter! For more information on calculations in valuation see our Business valuation calculator, Finding the correct multiplier and How much is your business worth.


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Posted on by JS Reakes

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