The loss of a “key person” from a business could disrupt day-to-day operations, alarm customers, lenders and suppliers, and drain working capital reserves. But how do valuators quantify the value of key people? This article looks at the factors they consider when evaluating a key person discount and how they judge the ability of others to take over a key person’s responsibilities and relationships. It also discusses the three valuation methods they generally choose from.
Critics of the excess earnings method call it subjective, ambiguous and outdated. Yet the method remains a viable tool, especially when valuing small professional practices for divorce purposes. Because of its perceived simplicity, the excess earnings method can also serve as a meaningful sanity check for other methods. This article explains how it works.