Two income methods sit alongside the multi-period discounted cash flow you already build. Both exist because a small private company frequently cannot support a five-year forecast that anyone would defend.
What is the capitalized cash flow method?
Capitalized cash flow collapses the forecast into one sustainable figure and one growth rate:
value = normalised cash flow × (1 + g) ÷ (k − g)
It is the Gordon growth model with the pretence of a forecast period removed, and it is the honest choice when a business is mature, when its growth is genuinely a single number, and when a five-year model would be five copies of year one with a growth factor applied. It is the wrong choice when the business is mid-way through a capacity expansion, a customer transition or a margin recovery, because a single sustainable figure does not exist yet.
The word normalised in that formula is the section on normalising earnings. The word sustainable is doing separate work: the cash flow must be maintainable, which usually means maintenance capital expenditure rather than growth capital expenditure, and a working-capital charge consistent with the growth rate being capitalised.
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How does the excess earnings method work?
The excess earnings method splits the business into two assets and values each at its own rate. Tangible assets earn a modest, secured-lending-like return; anything the business earns above that is attributed to intangibles (customer relationships, process knowledge, a reputation in a cluster) and capitalised at a much higher rate because it is much less certain.
value = net tangible assets + (normalised earnings − required return on tangibles) ÷ intangible capitalisation rate
It has a long institutional history: the US Internal Revenue Service's Revenue Ruling 68-609 sets out this formula and, in the same breath, calls it a method of last resort to be used only when no better basis is available. That caution is well placed, because the answer is extremely sensitive to two rates that nothing observable pins down. Every practitioner should be able to compute it, and few conclusions should rest on it.
A structural warning about the method is worth carrying. Capitalising excess earnings at a flat rate with no growth term implicitly values the intangibles as a no-growth perpetuity, while a capitalized-cash-flow model on the same business may assume 5% growth. The two answers will differ, and the difference is a modelling assumption rather than a finding about the company.
Treat the method as a check on the others. It makes a poor conclusion on its own.