{"id":5171,"date":"2025-05-12T07:54:01","date_gmt":"2025-05-12T05:54:01","guid":{"rendered":"https:\/\/www.conpair.de\/magazine\/company-valuation-using-the-capitalized-earnings-value-method-2\/"},"modified":"2025-10-17T11:15:19","modified_gmt":"2025-10-17T09:15:19","slug":"company-valuation-using-the-capitalized-earnings-value-method-2","status":"publish","type":"magazine","link":"https:\/\/www.conpair.de\/en\/magazin\/company-valuation-using-the-capitalized-earnings-value-method-2\/","title":{"rendered":"Company valuation using the capitalized earnings value method"},"content":{"rendered":"\n

Are you toying with the idea of selling your company? Then there’s one question you won’t be able to avoid: \u201cWhat is my company actually worth?<\/strong>\u201d Because at the latest when a company sale, a succession plan or a strategic realignment are on the table, a precise company valuation becomes the central basis for decision-making.<\/p>\n\n\n\n

One of the best-known valuation methods in this context is the capitalized earnings value method<\/strong>. But what is behind it – and is it really suitable for determining the value of your company? In this article, we provide a well-founded overview and explain why you should definitely rely on professional support for the valuation.<\/p>\n\n\n

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    What is the capitalized earnings value method? – Definition and classification<\/h2>\n\n\n\n

    The capitalized earnings value method is one of the overall valuation methods<\/strong>. The aim is to determine the company value on the basis of future financial surpluses<\/strong>. It is therefore a future-oriented valuation model in which not only past values are considered, but above all the question: What will the company earn in the future – and what is this income worth today?<\/strong><\/p>\n\n\n\n

    The enterprise value is essentially derived from the present value of the projected profits for the coming years and is supplemented by a so-called perpetual annuity.<\/p>\n\n\n\n\n\n\n\n

    The term “perpetual annuity”<\/h3>\n\n\n\n

    The term “perpetual annuity” – also known as “terminal value” – refers to the part of the enterprise value that results from the earnings after the specific planning period<\/strong>. It is assumed that the company will generate a constant profit from the last planning year onwards for an indefinite period.<\/p>\n\n\n\n

    For small and medium-sized companies in particular, the perpetual annuity often accounts for the largest share of the capitalized earnings value<\/strong> – often over 75%. This makes it all the more important that the underlying assumptions are realistic and professionally derived.<\/p>\n\n\n

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    In detail: How does the capitalized earnings value method work?<\/h2>\n\n\n\n

    The capitalized earnings value method calculates the company value based on its expected future profits – these are discounted to the present day using a specific interest rate<\/strong>. This results in a value that realistically reflects the future earning power. The process is divided into several steps:<\/p>\n\n\n\n

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    1. Define planning period:<\/strong>\r\n\r\nFirst, a realistic period is defined, usually between three and five years<\/strong>. The expected annual surpluses<\/strong> (after adjustment) are forecast for this period.<\/li>\n\n\n\n
    2. Clean up financial data:<\/strong>\r\n\r\nThis is followed by an analysis of the income statement and balance sheet. Extraordinary, out-of-period or non-operating items are eliminated<\/strong> to present the actual economic situation. The aim is to create a reliable basis for the valuation.<\/li>\n\n\n\n
    3. Determine capitalization interest rate:<\/strong>\r\n\r\nThe interest rate used to discount future profits consists of a risk-free base interest rate<\/strong> (e.g. long-term German government bonds) and a company-specific risk premium<\/strong>. The higher the capitalization interest rate, the lower<\/strong> the company value – and vice versa.<\/li>\n\n\n\n
    4. Discounting cash flows:<\/strong>\r\n\r\nThe planned annual surpluses are discounted to the present day<\/strong> using the capitalization interest rate. This results in the present value of the expected profits<\/strong> during the planning period.<\/li>\n\n\n\n
    5. Calculate perpetual annuity (terminal value):<\/strong>\r\n\r\nFrom the end of the detailed planning period, it is assumed that the company will generate a constant profit in the long term<\/strong>. This perpetual annuity is also calculated using the capitalization rate and discounted to today’s value. In practice, it often accounts for the largest share of the total value<\/strong>.<\/li>\n\n\n\n
    6. Calculate equity value:<\/strong>\r\n\r\nThe sum of the present values of the individual years plus<\/strong> the perpetual annuity gives the equity value<\/strong>.<\/li>\n<\/ol>\n\n\n\n

      This structured approach shows: Even if the process is logically structured, it requires a great deal of specialist knowledge and experience – especially when it comes to selecting realistic parameters. Therefore, professional advice and evaluation is always the safest way forward<\/strong>.<\/p>\n\n\n

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      Who is the capitalized earnings value method suitable for?<\/h2>\n\n\n\n

      In principle, the capitalized earnings method is suitable for companies that have been on the market for several years, generate stable earnings<\/strong> and operate in a comparatively constant economic environment<\/strong>. It is traditionally used in particular for M&A transactions or family succession solutions.<\/p>\n\n\n\n

      Typical fields of application:<\/p>\n\n\n\n