Handbook of Business Valuation

By Thomas L. West; Jeffrey D. Jones | Go to book overview

CHAPTER SEVENTEEN
Multiple of Discretionary
Earnings Method
JEFFREY D. JONESThe Multiple of Discretionary Earnings Method is one of several wellknown appraisal methods within the Income Approach that can be used to determine indications of value for a business enterprise. Most business appraisers will use more than one Income Approach to verify a final opinion of value. Other common appraisal methods include the Capitalization of Earnings Method, Excess Earnings Method, and Discounted Earnings Method.The procedures for these methods are not the same, because they use different criteria for their basis of value which include:
Level of earnings (pretax, after-tax, cash flow, or discretionary)
Factors used to convert earnings into value (capitalization rates, discount rates, multipliers)
Treatment of the required working capital and operating assets
Despite these differences, if the procedures utilized are correctly applied, all these methods should develop indications of value within a narrow range of each other. If one or more of these methods produces a value significantly different from the others, there is a high likelihood that one or more of the methods was used incorrectly. When divergent values are obtained, the procedural error can usually be traced to one or more of the following actions:
Improperly calculating the level of earnings.
Utilizing an incorrect factor.

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