Buying a Business – What is Profit
There are many versions and definitions of profit. A Business Broker will provide potential buyers with financial records, who need to be aware of the subtle differences in terminology used to describe profit, so that they can understand the impact and implications of these differences. Some of the different methods used in reporting profit are:
- Owner Operator. The pre-tax return earned by a working owner – includes the owner’s wages.
- EBIT. Earnings Before Interest & Tax. Does not include owner’s wages.
- PEBIT. Proprietors Earnings Before Interest & Tax. Includes owner’s wages.
- EBITDA. Earnings Before Interest, Tax & Depreciation Amortisation. Does not include owner’s wages.
- PEBITDA. Proprietors Earnings Before Interest, Tax & Depreciation Allowance. Includes owner’s wages.
- After Tax Profit. The profit after adjustment, and after paying company tax. Used by publicly listed companies.
- Adjusted Nett. The Profit after adjusting for abnormal or personal expenses and income.
- Annualised Nett. The profit calculated by taking a part-year’s profit, and dividing by the number of months, then multiplying by twelve to estimate a year’s result.
According to my friend, who writes for Fresh Loan, every business is run differently to suit the individual needs and requirements of the owners and shareholders. In order to accurately compare one business with another it is necessary to make adjustments to the income and expenses. These adjustments are often referred to as “add-backs”.
On the income side the type of adjustments that are made are; exclusion of interest received, exclusion of profit on sale of assets, and sometimes the correction of opening or closing stocks. If you are interested in getting into trading stocks check out this great website xm trading.
On the expense side there can be many expense items that are on the accounts simply to minimise tax. Such items often adjusted are; accountancy, interest, depreciation (debatable), personal phone, motor vehicle, owners wages, or owner’s family member wages, some taxes, and some rebates.
It is essential when looking at a set of accounts, that all adjustments are shown and itemised. Often these are not itemised, and it is important that you look carefully at these numbers to ensure their source and their relevance to how you would operate the business, it is important for you to consider paradigm training way before you start your business. At this stage you should be starting to calculate what you believe the profit is.
The expression of profit can be a subjective matter, rather than fact. Your ability to understand the accounts presented to you, and what you believe the profitability to be, will form the basis of your plans for the business, its growth, and your management of the business.
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Banks lend on the past profits, or historic accounts of the business, yet it’s the future profits that are going to repay the bank that loan. We need to recognise that the historic figures are the proven results of the business’s trading, and the future is unproven.
It is therefore wise to prepare both historic accounts and forecasts and use both of these tools to analyse and assess the business. It’s also wise to remember that the business you are going to buy is more than just numbers, and profits.
Obviously profit is essential, but you have to have a passion for your business and really enjoy what you’re doing. Look for a business that you will be proud of. One that rewards you in more ways than simply financial rewards.