13 Aug When to Use Excess Earnings to Value a Company
Below are a few pointers on when using excess earnings to value a business is appropriate:
- The company’s value is derived primarily from its earnings (applies to most companies).
- The company has an established earnings history.
- Enough reliable data is available to reasonably estimate expected normal earnings.
- Current earnings are expected to approximate future earnings.
- Earnings for the subject company are significantly positive (that is, neither negative nor marginally positive).
- Expected growth rates are modest and predictable.
- If valuing a controlling interest, owners’ benefits can be reasonably estimated. (such benefits include compensation, perquisites. personal expenses paid by company.)
- The business being valued is a small business or professional practice.