We have integrated AI-powered automation into our delivery model, raising our margins significantly over the last twelve months. The buyer wants to use a five-year historical average valuation, which dilutes this recent impact. How do we argue for a capitalized earnings model that reflects our current run-rate?

Question

Tyler Smith · Accepted Answer

A five-year historical average valuation penalizes you for past operational inefficiencies that have been permanently resolved by your recent technology investments. Under IVS 105, the capitalization of earnings method is the correct approach when a company has achieved a new, sustainable level of performance. To defend this valuation method, you must prove to the buyer that your margin expansion is a structural change, not a temporary spike. Present a detailed run-rate analysis of your last two quarters, isolating the cost savings achieved through your AI-powered workflows. Show the buyer how these automated systems have permanently reduced your labor requirements and accelerated delivery times, creating a highly scalable model. Document these workflows within your EOS operational processes to prove they are institutionalized and repeatable. By demonstrating that your current earnings run-rate represents the new baseline of the company's performance, you can justify using the capitalization of earnings method based on current performance rather than historical averages. This shifts the valuation discussion to your true forward-looking cash flow potential, securing a much higher transaction price.