Glossary

With over 200 terms in both English and French, our M&A Dictionary is designed to help you better understand the key words and concepts related to the sale oe purchase of a business in Canada.

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Capitalization of Earnings Method

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Category: Business Valuation

Definition:

The Capitalization of Earnings Method is a business valuation technique that determines the value of a business by capitalizing its expected future earnings. This method falls under the broader category of the Income Approach, which values a business based on its ability to generate income. The formula is generally expressed as: Business Value = Expected Earnings /Capitalization Rate. The Capitalization of Earnings Method is particularly suited for businesses where the ability to generate consistent earnings is a key factor in determining value. It is often applied to businesses with stable and predictable earnings, as the method assumes that the current earnings level can be sustained into the future. The choice of the capitalization rate is crucial, as it reflects the risk associated with the business. A higher risk business would typically have a higher capitalization rate.This method is commonly used in conjunction with other valuation methods to provide a more comprehensive assessment of a business’s value.