The goal is earnings the business can sustain
An earnings-based valuation does not value last year's profit. It values the profit a buyer could reasonably expect the business to keep earning from the valuation date onwards, often called maintainable earnings. Historical results are the main evidence for that figure, but they are evidence, not the answer.
So the choice between last year, an average, a weighted average and a forecast is really a question about which of them best predicts the business's sustainable level of earnings. That depends on the pattern in the results. ASIC's guidance on expert reports describes the earnings method in terms of estimated future maintainable earnings, and the ATO's market valuation guidance lists the inappropriate use of averaging, and unreasonable assumptions including the use of proxies based on historical performance, among the issues it commonly sees on review. Both point the same way: the earnings figure has to be chosen for a reason.
Choose the earnings figure for a reason, in three steps
Normalise every year first
On a consistent basis, so the years being compared are like with like.
Read the pattern
Stable, growing, declining, recovering from a disruption, or different now. The answer drives the method.
Test against the present
Year-to-date results, the current order book, staff numbers and pricing at the valuation date.
What a valuer actually looks at
Normalise every year first
Averaging raw profits mixes the effects of one-off costs, owner salary choices and unusual income from different years. Each year should first be normalised on a consistent basis, so that the years being compared are like with like. See what counts as a non-recurring expense and normalising a working owner's salary for those adjustments.
Then read the pattern
Once the years are comparable, the question is what story they tell. Is the business stable, growing, declining, recovering from a disruption, or different now from how it was? The answer drives the method.
Then test against the present
Whatever historical figure emerges should be checked against current trading at the valuation date: year-to-date results, the current order book, staff numbers and pricing. If the figure is far from what the business is doing now, the reason needs explaining.
Decision table
| Pattern in normalised results | Usually most representative | Why | Watch for |
|---|---|---|---|
| Stable: results move within a narrow band with no clear direction | A simple average of recent years | Smooths ordinary year-to-year noise | Check the latest year is not the start of a new trend |
| Growing steadily | Latest year, or a weighted average that favours recent years, cross-checked to current trading | A simple average anchors value to earnings the business has outgrown | Growth that depended on one contract or a temporary market condition |
| Declining steadily | Latest year, or lower if the decline is continuing at the valuation date | Averaging includes better years that are unlikely to return | Whether the cause of decline has been addressed, and evidence for that |
| One unusually bad (or good) year with a documented cause | Average of the other years, or normalise the unusual year, provided the cause is genuinely not ongoing | Lets the unusual year count without letting it dominate | A "bad year" that is really the start of a decline |
| Recent structural change (new premises, lost or won major customer, new service line, price reset) | Post-change results, or a forecast based on them | Pre-change years describe a different business | Too little post-change history to rely on; a forecast then needs strong support |
| Volatile with no clear pattern, or loss-making | An earnings multiple on a single figure may not be suitable | See the separate guide on negative or volatile earnings | Forcing a figure the evidence does not support |
For the last row, see valuing a business with negative or volatile earnings.
Worked example
This example is hypothetical. The figures are normalised EBITDA for years ended 30 June.
Case A: a growing business
| Year | Normalised EBITDA | Weight |
|---|---|---|
| FY2024 | $240,000 | 1 |
| FY2025 | $270,000 | 2 |
| FY2026 | $300,000 | 3 |
- Simple average: ($240,000 + $270,000 + $300,000) ÷ 3 = $810,000 ÷ 3 = $270,000.
- Weighted average (1:2:3): ($240,000 × 1) + ($270,000 × 2) + ($300,000 × 3) = $240,000 + $540,000 + $900,000 = $1,680,000. Divided by the sum of the weights (1 + 2 + 3 = 6): $1,680,000 ÷ 6 = $280,000.
- Latest year: $300,000.
The three figures span a range of $30,000, from $270,000 to $300,000. If current trading at the valuation date is running at or above the FY2026 level and the growth has a clear cause, the simple average understates sustainable earnings. If the growth came from a contract that has since ended, even the weighted figure may be too high. If the latest year or a forecast is adopted because of growth, the capitalisation multiple should not also be increased for that same expected growth; otherwise the growth is counted twice.
For a growing business, the three methods span $30,000, from $270,000 to $300,000
- Simple average$270,000
- Weighted average (1:2:3)$280,000
- Latest year (FY2026)$300,000
Case B: one bad year
Same business, but FY2025 normalised EBITDA was $150,000 because a fire closed the premises for three months. The business reopened fully and has traded normally since. Any business interruption insurance received for the closure needs to be identified, because it affects what the FY2025 figure represents.
- Simple average: ($240,000 + $150,000 + $300,000) ÷ 3 = $690,000 ÷ 3 = $230,000.
- Weighted average (1:2:3): $240,000 + ($150,000 × 2) + ($300,000 × 3) = $240,000 + $300,000 + $900,000 = $1,440,000 ÷ 6 = $240,000.
- Average excluding FY2025: ($240,000 + $300,000) ÷ 2 = $540,000 ÷ 2 = $270,000.
Both averages are pulled down by the closure. The weighted average gives the closure year twice the weight of FY2024, so it still sits $30,000 below the figure that leaves the closure year out. Where the cause is documented and finished, excluding or normalising the affected year is usually more representative. Where it might recur, it should stay in.
A documented one-off closure pulls both averages below the $270,000 that leaves the closure year out
- Simple average$230,000
- Weighted average (1:2:3)$240,000
- Average excluding FY2025$270,000
The weights 1:2:3 are used here for illustration only, not as a rule. Any weighting needs a reason that fits the pattern.
Limitations
- No mechanical formula replaces judgement. The method should be explained in a way someone else could follow and test.
- Information that came to light after the valuation date generally cannot be used, unless it was reasonably foreseeable at that date. This matters for retrospective valuations.
- A forecast used in a discounted cash flow needs critical analysis of the assumptions, not just acceptance of management's numbers.
- Choosing the earnings figure is only one step. The capitalisation applied to it, and the bridge from business value to share value, are separate questions; see enterprise value vs equity value.
The Oliver Group explainer on the future maintainable earnings method covers how the chosen earnings figure is then capitalised.
Next steps
- Gather at least three years of financial statements and the current year to date.
- Normalise each year on the same basis before comparing them, using the earnings normalisation worksheet.
- Write one sentence describing the pattern: stable, growing, declining, one unusual year, or changed.
- Note the cause of any unusual year or recent change, with documents that show whether the cause has ended.
- Ask your accountant whether current trading supports the figure you are leaning towards.
Questions
Why three years? Is that a rule?
No. Three years is often used as a starting point because it usually shows a pattern without reaching back to conditions that no longer apply. The right period depends on the business: a cyclical business may need more years, and a business that changed fundamentally last year may need fewer.
Can the current year's results to date be used?
Year-to-date results known at the valuation date are often useful evidence, particularly for a growing or changing business. They need care with seasonality, and a part year should not simply be multiplied up without checking that the months are representative.
Is a forecast more reliable than history?
Not by itself. A forecast is only as good as the evidence behind it, such as signed contracts, current run rates and documented changes. History is usually the test a forecast is measured against.
Sources
- Market valuation for tax purposes, Australian Taxation Office. Lists inappropriate use of averaging, unreasonable assumptions including proxies based on historical performance, and reliance on unforeseeable post-valuation-date events among common review issues.
- Regulatory Guide 111: Content of expert reports, Australian Securities and Investments Commission. RG 111.86 describes applying earnings multiples to estimated future maintainable earnings; RG 111.115 calls for critical analysis of forward-looking information used in a DCF.
Cite or reuse this page
Valuo Insights team (2026). Which year's profit should a business valuation use?. Valuo. https://valuo.com.au/insights/which-years-profit-choosing-maintainable-earnings/ (updated 14 November 2026).
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General educational information, not financial, tax or legal advice. Worked examples are hypothetical and do not value a real business. A valuation depends on its purpose, the evidence and the agreed scope.