Rule of Thumb Business Valuations
I have been valuing businesses for well over 30 years and the one constant I have been asked over that period is “What are rule of thumb business valuations, and what is the rule of thumb for this business?”
So, let’s look at what a rule of thumb is.
A heuristic technique or a heuristic for short, is any approach to problem solving or self-discovery that employs a practical method that is not guaranteed to be optimal, perfect or rational, but which is nevertheless sufficient for reaching an immediate, short-term goal. “Heuristic” is also often used as a noun to describe a rule-of-thumb,
Rules of thumb are simple pricing techniques that business brokers typically use to approximate the market value of a business. Rules of thumb fail to consider the specific characteristics of a company as compared to the industry or other similar companies. In addition, they do not reflect changes in economic, industry, or competitive factors over time.
Business valuation theory and practice does not include specific methodology for rules of thumb in developing a value, as there is typically no empirical evidence relating to how the rules were derived or if, in fact, the rules are reflective of transactions in the market. This is often the case as although many business owners use a rule of thumb that is hearsay, there is obviously never any solid evidence to support it.
Parties that seek to avoid the relatively small cost of a properly prepared business valuation and opt for any kind of rule of thumb method, not only mistakenly believe that the business valuation process can’t be complex, but may well under price their business by many ten of thousands of dollars.
Considering that business valuations are a legitimate business expense it is common sense to have a properly prepared valuation undertaken. A business valuation report that is prepared by an expert with the correct experience and qualifications, and one that is defensible, concise and understandable, rather than rely on a rule of thumb that actually has no basis of fact.
The principle of Business Reports and Values, Lee Goldstein, has been involved in Business Valuations since 1985. He holds the following qualifications:
Double Major Degree in Accounting and Finance
Diploma in Forensic Accounting
Graduate Diploma in Valuation
Advanced Certificate of Business
Advanced International Certificate in Intellectual Property