Who still uses the excess earnings method?

BVWireIssue #125-2
February 13, 2013

That’s a good question, says James Alerding (Alerding Consulting). After all, none of the BV professional standards explicitly feature the excess earnings method (EEM)—but neither do they expressly preclude its application. In Alerding’s experience, the EEM “is still commonly used in valuation circles, especially in divorce cases and litigation cases involving smaller businesses.” BV appraisers also use it to determine a purchase price for a shareholder interest in a small business, he adds, and “these are just a few of the contexts in which I have seen the EEM used within the past year.” Elements of it also appear in fair value for financial reporting, in particular when discounted multiyear excess earnings provide support for valuing specific intangible assets, he points out. “In fact, paragraph 33 of SSVS-1 mentions that specifically.”

Even appraisers who no longer routinely apply the EEM will run across the method in others’ reports and will need to know its “pros and cons” to provide an informed critique. Don’t miss the webinar tomorrow, February 14, The Excess Earnings Method, in which Alerding will provide a thorough overview of the method’s strengths and weaknesses, as well as its particular application in valuing goodwill in divorce.

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