HOW TO VALUE RETAINED EARNINGS?
I am looking at a small business in which the owners have kept a sizable amount of retained earnings in the business every year, growing the amount gradually after they've paid themselves relatively modest dividends. Now the retained earnings are approaching the size of their annual revenue. Is this normal? I think that it might be a good thing, especially as we look toward an economic slowdown, but does it affect the value of the business? Not surprisingly, they think the business is worth more than I would be prepared to offer based on an annual EBITDA multiple alone... Or are retained earnings from the previous year rolled into annual EBITDA?