We recently automated our core service delivery with AI, which doubled our profit margin over the last nine months, but the buyer's QofE auditor insists on using a three-year historical average to value our business. How do we defend our current run-rate margins using the capitalization of earnings method?

Question

Tyler Smith · Accepted Answer

Relying on a three-year historical average of your earnings completely dilutes the value of recent operational improvements. If your leadership team has successfully integrated AI-powered automation to drive up margins over the last year, those historical years represent a business model that no longer exists. Under valuation standards like IVS 105, you must argue for the Capitalization of Earnings method, which focuses on your current run-rate and the future economic benefits of your automated operation. To defend your current margins, you must present the buyer with clean, normalized monthly data. Run a sell-side Quality of Earnings audit that clearly separates the old, manual delivery costs from your new, automated cost structure. Show that the margin expansion is permanent, predictable, and fully scalable. In your negotiations, demonstrate that your AI workflows are fully documented and that your team has the GWC™ to run them without the founder's involvement. If the buyer insists on a three-year average, they are trying to buy a high-margin, automated business at a discount based on your old, manual cost structure. Do not let them. Stand firm on the principle that the value of a business is the present value of its future cash flows. If your current run-rate is producing double the cash flow of two years ago, your valuation must be calculated using a capitalized model of that current run-rate, not a historical average that includes outdated operations.