Excess Earnings & Business Goodwill

Income approach · also called the treasury method, excess earnings method

In the app this is the Business Goodwill worksheet.

The excess earnings method answers a question courts and buyers both ask: how much of this price is bricks and how much is reputation? It splits earnings into a return the tangible assets should produce and the surplus attributable to intangibles — the customer list, the trained crew, the name over the door — then capitalizes the surplus at a higher rate reflecting its fragility.

When to use it

• You must allocate purchase price between tangible assets and intangibles.
• Personal versus enterprise goodwill is at issue, as in a divorce matter.
• The company earns well above the return its asset base alone would justify.

When it misleads

• Excess earnings are negative, which means there is no goodwill to capitalize.
• The two capitalization rates cannot be supported independently.
• The result is used alone; it is a cross-check and an allocation tool, not a standalone conclusion.

What ExitSight asks you for

Worked example

Sample engagement: