GOING CONCERN VALUATION LLC
The Total Excess Earnings Model
The model below is an example of the excess earnings model used in many of the Going Concern Appraisals done by GCV. The article introducing this model won the 2011 Armstrong/ Kahn award as the best article of that year in The Appraisal Journal. The asset values (V) add up to the total value of the Going Concern, and the Income (I) adds up to the total income (or more specifically Net EBITDAR) for the Going Concern. The individual asset capitalization rates (R) blend to the Going Concern Cap Rate, which in this example is 13.50%. There is no single way to complete the model. The known values are entered into the model, and the model then calculates the missing cells. For example, for this nursing home, we have good evidence of Going Concern Cap Rates for nursing homes. If this were a property type where there was limited evidence of Going Concern rates, the intangible rate might have been adopted as a typical intangibles rate (such as 25%), and the total value of the going concern would have then been the sum of the asset values, with the rate calculated by dividing the income by the value.
The cells in the model work together similar to a jigsaw puzzle. The inputs that are most readily obtainable are entered into the model, with the model than calculating (by addition, multiplication or division as appropriate) the missing cells. Another advantage of the model is that the rates tend to support the risk management aspect of financing, with the riskier assets having higher rates.