Use this guide to identify risky valuation shortcuts based on rules of thumb instead of proper analysis.

What Are Rules of Thumb?

• Simple heuristics like ‘3x earnings’ or ‘1x revenue’ used to estimate value without detailed analysis.
• Often based on anecdotal deals or broker norms—not on real market data or normalized financials.

Why They’re Dangerous in SBA Lending

• They ignore the specific cash flow, risks, and capital needs of the subject business.
• They may reflect strategic or synergistic buyer pricing—not FMV.
• They can create overvaluation and under-collateralized loans.

Common Red Flags

• Valuation uses a single multiple with no source or benchmark.
• No adjustments to earnings or free cash flow before applying multiple.
• Same multiple used across unrelated industries or deal sizes.
• Multiples applied to revenue or EBITDA without justification.

SBA SOP Reminder

All business appraisals must comply with the SBA requirement for fair market value based on sound valuation approaches (income, market, or asset-based)—not broker heuristics.