Foundations Of Business Valuation: What Is Maintainable?

A business that is considered to be economically viable is generally valued on a going concern approach implying that the business will continue to operate into the future. One of the more common techniques used to assign value under the going concern approach is the Capitalized Cash Flow Methodology. This methodology is typically adopted for mature businesses with relatively stable earnings that can be reasonably estimated into perpetuity and/or when a reasonable forecast of cash flows is not available.

Two principal components of the capitalized cash flow methodology are:

(a) the annual after-tax maintainable earnings; and,

(b) the after-tax risk adjusted rate of return. The maintainable earnings after-tax is "capitalized" by this rate of return.