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The “excess earnings” method is a method that is commonly used to determine the value of the goodwill in a professional practice. (Hogoboom & King, Cal. Practice Guide: Family Law (The Rutter Group 2005) ¶ 8:1445, p. 8-350.) Broadly put, the excess earnings approach is predicated on a comparison of the earnings of the professional in question with that of a peer whose performance is “average.” 


“Pursuant to this method, one first determines a practitioner's average annual net earnings (before income taxes) by reference to any period that seems reasonably illustrative of the current rate of earnings. One then determines the annual salary of a typical salaried employee who has had experience commensurate with the spouse who is the sole practitioner or sole owner/employee. Next, one deducts from the average net pretax earnings of the business or practice a ‘fair return’ on the net tangible assets used by the business. Then, one determines the ‘excess earnings’ by subtracting the annual salary of the average salaried person from the average net pretax earning of the business or practice remaining after deducting a fair return on tangible assets. Finally, one capitalizes the excess earnings over a period of years ...

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