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Net profit before tax

Net profit before tax is what a business earns after all its costs, including interest and depreciation, but before tax on its profits. It is the starting point for SDE and EBITDA.

Also called profit before tax

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Definition

Net profit before tax is the profit a business makes after every cost has been deducted, including wages paid through payroll, rent, interest and depreciation, but before tax on the business's profits. In the US it is often called pre-tax income. Where profits are taxed on the owner's personal return, as with sole traders and some US company structures, the accounts may show no tax line at all, so the bottom line is effectively profit before tax.

Depreciation and amortisation

Depreciation and amortisation spread the cost of long-lived assets over the years they are used. They reduce profit without any cash leaving the business in that year.

Worked example

Brackenfold Pet Supplies is a fictional US business with revenue of $1,500,000 and total costs of $1,320,000. Those costs include the owner's salary and benefits of $90,000, $15,000 of loan interest and $25,000 of depreciation.

Net profit before tax is $1,500,000 minus $1,320,000, which is $180,000.

To reach SDE, add back the owner's salary and benefits, the interest and the depreciation: $180,000 + $90,000 + $15,000 + $25,000 = $310,000, before any evidenced one-off costs.

Seller's discretionary earnings (SDE)

Seller's discretionary earnings is the yearly financial benefit a business gives one full-time working owner, before financing costs, non-cash charges and one-off spending.

Why buyers care

Net profit before tax is the figure least shaped by the seller's own adjustments, so it anchors everything that follows. You can trace it to the filed accounts and tax returns and test it against bank statements, which is much harder to do with an SDE figure that already includes add-backs.

If a listing quotes only SDE, EBITDA or "cash flow", ask for net profit before tax and a line-by-line reconciliation to the headline figure. Loupe's valuation tool asks for net profit before tax as a required input and builds earnings up from it, so every addition is visible.

Add-backs

Add-backs are costs added back to reported profit to show what a business would earn under a new owner. They raise SDE and adjusted EBITDA, so each one needs evidence.

EBITDA

EBITDA is earnings before interest, tax, depreciation and amortisation. It helps compare operating profit across businesses, but it is not the same as cash.

Related terms

  • Seller's discretionary earnings (SDE)

    Seller's discretionary earnings is the yearly financial benefit a business gives one full-time working owner, before financing costs, non-cash charges and one-off spending.

  • EBITDA

    EBITDA is earnings before interest, tax, depreciation and amortisation. It helps compare operating profit across businesses, but it is not the same as cash.

  • Adjusted EBITDA

    Adjusted EBITDA is EBITDA after normalising adjustments, showing what a business would earn with a paid manager in the owner's seat. Larger small-business deals are usually priced on it.

  • Add-backs

    Add-backs are costs added back to reported profit to show what a business would earn under a new owner. They raise SDE and adjusted EBITDA, so each one needs evidence.

  • Normalised earnings

    Normalised earnings are profits restated to show what a business would earn in a typical year under a new owner, after removing one-off items and correcting costs that are not at market rates.

  • Depreciation and amortisation

    Depreciation and amortisation spread the cost of long-lived assets over the years they are used. They reduce profit without any cash leaving the business in that year.

Guides

  • SDE and EBITDA explained with worked examples

    SDE and adjusted EBITDA both restate a business's profit for a buyer, but they answer different questions. This guide builds each one up line by line for two fictional businesses and shows which to use.

    9 minutes to read

  • Add-backs: which hold up and which do not

    Add-backs turn the profit in the accounts into the earnings on a listing, and each one is paid for several times over in the price. This guide shows how to test them and which usually survive.

    9 minutes to read

  • How to read a business-for-sale listing

    A listing is a sales document written to win enquiries. This guide shows how to read its numbers, its wording and its gaps, and how to turn them into questions before you sign an NDA.

    10 minutes to read

Red flags

  • Tax returns that do not match the accounts

    When the profit in the tax returns cannot be reconciled to the profit in the accounts, you cannot tell which figures to trust, and there may be tax owed.

    Severity: deal breakerFinancials

  • Large or undocumented add-backs

    Add-backs raise the earnings a price is based on. When they are large, vague or unsupported, much of the asking price rests on claims rather than records.

    Severity: price it inFinancials

  • Figures that change between the teaser and later documents

    Revenue, profit or add-backs in the teaser or listing do not match the information memorandum, the management accounts or the tax returns. Some changes have a simple explanation; others mean the first figures were never real.

    Severity: price it inSeller and process

Free tools

  • See a low, likely and high value from the figures you have, and whether the asking price holds up.

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