It is important to remember that the true value of a business is what someone will pay for it. To arrive at this figure, buyers use various valuation methods.
How to Calculate Profit
If you are considering buying a business, work out what the 'true' profitability is.
Compare the owner's stated profits with the audited figures.
- Question any differences.
Look for costs which could be reduced under your ownership.
For example:
- Payments to the owner and to other shareholders.
- Unnecessary property leases.
- Supplies - you may know a cheaper supplier.
Look for areas to 'restate' (the accountancy term for changing a figure from one kind of cost to another).
For example, money spent on software development may have been capitalised by the owner. You might consider that it should have been treated as a cost.
- Use your own accounting policies when calculating the business' profits.
This will often result in a significantly different profit figure.
When looking at future profits, bear in mind the costs of achieving them.
These may include:
- Servicing increased borrowings.
- Depreciation of investment in plant, machinery, or new technology.
The arrival of new management often leads to major changes which may mean higher costs and lower productivity in the first year.
Business Advice 
