‘Super profit’ is similar to real profit and is a term used mainly in smaller businesses. Some small business owners express their profit as gross annual profit before deducting their own salaries (or any amount for market-related salaries that should be paid to compensate the owners for the work they undertake in the business). In these cases, super profit is the amount of profit after deduction has been made for these salaries. For example, if a business’s real profits after adjusting for all non-business expenses, but before allowing for owners’ market related wages of £80000 is £250000, then the super profits would be £170000. Or, if in another business the profit is also £250000 per annum, but market related wages for the owners working in this business are £120000, the super profits would be £130000.
WHAT is CAPITALISATION?
I have already mentioned that, generally, to arrive at the value of a small business one capitalises profits. Capitalisation is the simple process by which you multiply the profit by a multiple (or ratio) to arrive at value. The question of what multiple should be used to arrive at a ‘true’ valuation takes up a good part of this appendix, as it is involved with the concept of risk and return. I cover this in more detail in the section on the Price Earnings Ratio method of valuation, below.