Top 10 Questions of Value: 6. Are “Rules of Thumb” Useful in Business Valuations?

Rules of Thumb are generally expressed as multipliers. A common example would be that some particular type of business will sell for .75 to 1.50 times annual revenues. Another popular multiple is a multiple of discretionary earnings. For example, a particular type of business is said to sell for X times Seller’s Discretionary Cash Flow (SDCF), or Owner’s Cash Flow (OCF). There may also be other rules of thumb relating to some measure of physical volume, such as X dollars times each keg of beer sold per month.

Are such rules of thumb useful? Generally, rules of thumb should not be used as a primary method of business valuation. The valuation of any type of business can change over time due to changes in technology, economic and industry conditions. Rules of thumb may be useful as “sanity checks” or guessing ballpark ranges but will seldom be accepted by courts as a substitute for a qualified valuation.

 

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