What earnings should I use to value my business? Should I use historical, projected or an average of historical earnings? The answer is…it depends. If you believe that your company has achieved stability, then you should use historical or an average of historical earnings and apply a growth rate that you think makes sense over the long haul, such as a growth rate consistent with inflation. For companies that operate in a cyclical industry, an average of historical years that matches the business cycle of the industry may be a reasonable base of earnings for a valuation. In some instances, such as a company that has recent growth yet operates in a cyclical industry, a weighted average of historical earnings may make more sense. However, if your company is expecting varying growth over the next several years, then it may be reasonable to value your business using projected cash flows. In any case, the earnings that are used to value the business should approximate future earnings expectations for your company.
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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.