Net profit concerns

Property agents have expressed concerned about the way in which reconstituted net profits (RNP) are calculated.

The figure, which is sometimes referred to as adjusted net profit (ANP), is derived from adding back to the net profit - shown on the profit-and-loss account - overheads that are not specific to the operation. These are items that are personal to how the current owner has financed or is operating the business, as well as depreciation.

The figure allows a potential purchaser to see the operating profit from which they would be able to service a mortgage, if necessary, and to pay managers or additional staff if they chose not to run things full time themselves.

Graham Allman, of GA-Select, said: "Some agents add back misleading figures; common ones include entertainment (discos and bands etc) - which is part of the cost of getting trade and therefore a cost to the business - motoring expenses (when not on business), and insurance (common to all and a must have)."

He continued: "These misleading add-backs can inflate net profits and therefore the value of the business by a big number. By adding back an 'illegal' £25,000 to a leasehold's RNP it could hype the value by £50,000, or in the case of a freehold an amazing £200,000. When an independent valuation takes place for a lending source, usually the bank, the application will collapse as the valuer is unlikely to share the view of the instructed agent."

David Morgan, of DMP Cookseys, said: "It requires a lot of experience to undertake a forensic analysis of accounts. It hinges on whether or not you can see through the accountants' jargon. If agent's have had experience running pubs I think it helps because they know what's involved. At the end of the day your calculations are going to be analysed by the purchaser's professionals, and if they're not right the sale's going to fall through. Standardisation would be good, but there's no consistency in the preparation of detailed profit-and-loss accounts."

Stephen Taylor, of Guy Simmonds, said: "A lot of deals are falling through at the moment - it's a waste of money and time. I think every one should define exactly what they mean by reconstituted net profits. That way nobody will be misled."

The majority of agents agree that agents and valuers should decide on a standard code such as a BS or ISO and the best way to monitor such regulation would be through the Office of Fair Trading, which already regulates and licences those operating within the financial credit services sector.