Excess Earnings Valuation Example

Step 1: Determine average stabilized pre tax earnings of company for the past three years. $80,000
Step 2: Determine average fair market value of assets used in the business for the same three-year period. $500,000
Step 3: Apply a fair rate of return, say 10% on the assets computed in Step 2 (10% x $500,000). $50,000
Step 4: Subtract Step 3 from Step 1. This equals excess earnings attributable to goodwill. $30,000
Step 5: Capitalize the excess earnings in Step 4 at a selected rate, say 50%, to yield the value of goodwill (2 x $30,000). $60,000
Step 6: Add tangible assets of the company (Step 2) to the capitalized goodwill value (Step 5). This sum equals fair market value. $560,000
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