The capitalization of earnings/cash flows approach “is more complex than just selecting the final year earnings/cash flows or trying to derive a value use of a weighting scheme,” writes J. Richard Claywell in the current Family Lawyer Magazine. “The appraiser must understand and have the experience to apply the methods correctly.” If not, attorneys can use the following five questions to identify any problems with the appraiser’s cap/earnings approach:
- How did you select and use the assigned weights?
- Based on your calculations, can you demonstrate that the earnings/cash flows are stabilized?
- If you are capitalizing the earnings/cash flows, why does the final year not represent the future?
- If the earnings/cash flows are not stabilized, why would you use this method?
- If growth is expected to continue beyond the final year, why would you use lower earnings than the final year’s earnings?