Understanding Adjusted Net Profit

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Understanding Adjusted Net Profit

Adjusted Net Profit

Adjusted Net Profit

 

Adjusted Net Profit is also sometimes called the “Owners Benefit” and the terms can be used interchangeably.

When net income or cash flow is calculated we use the Adjusted Net (Owner Benefit) figure.  This is the net profit on the P&L (profit and loss statement) or tax return plus owner’s benefits. The owner’s benefits are added back because every financial benefit an owner receives from their business regardless of its form is not considered a business expense and is added back as profit. Our goal is to ascertain the true financial performance of the business.

Depreciation and Amortization, Interest Expense, Non-Recurring Legal Expenses, Donations, Federal Taxes and non-essential expenses are added back. Other possible add backs include expenses such as owner’s health insurance, life insurance for owners, retirement plan contributions for owners, and non-essential salaries (such as relatives who draw a salary but do not actually work in the business).  Owner’s personal vehicle expenses (lease payments, operating expenses, gas, repairs, depreciation and insurance), owners non business related travel, entertainment and home telephone expenses.

As Business Brokers we calculate the Adjusted Net of a business and compare it to similar businesses which have sold. We use this sold comparable data to arrive at a price range when listing a business for sale.

For business buyers the Adjusted Net figure is best thought off as the amount available to 1) pay themselves a salary and benefits 2) Pay a ROI (return on investment) 3) cover any possible debt service.

Sellers should understand that this Adjusted Net is the most important number when valuing their business for sale. As a general rule the larger this number the more a buyer will be willing to pay for the business.

Anthony John Rigney PA is a Business Broker in Jacksonville Florida. Call 904-725-7677 for a free and confidential consultation

 

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