Adjusted net income is the reported profit or loss of a business, modified by a potential acquirer to arrive at the net income that the acquirer can expect if it buys the business. This concept is used to derive a purchase price to offer the owners of the business.
There are a number of possible adjustments to net income, which include the following:
- Additional maintenance expense. If the current owners have neglected the upkeep of company assets, the new owner must spend extra to provide adequate maintenance.
- Compensation adjustments. The current owners may have overpaid or underpaid themselves in relation to the market; if so, adjust net income to reflect a more appropriate compensation level. There may be no need for owner positions at all, in which case the related compensation can be added back to net income.
- Interest expense. The new owners will presumably pay off all existing debt held by the company, in which case the related interest expense can be added back to net income.
- Personal expenses. If the current owners have been charging personal expenses through the company, add these amounts back to net income. This can include all benefits and pension payments made on behalf of the owners.
- Revenue adjustments. Competitors can be expected to contact the company's customers as soon as an acquisition is announced, to attempt to pull away some customers. This can trigger a downward adjustment in net income.