Value Blog

A rule of thumb is defined in the International Glossary of Business Valuation Terms as “a mathematical formula developed from the relationship between price and certain variables based on experience, observation, hearsay, or a combination of these; usually industry specific.”  Typically they are representative of the average price paid in an industry.  So, it would appear that using a rule of thumb would provide a good estimate of the value of a company. Should Company B still be worth twice as much as Company A?

It is the appraiser’s job to look at the facts and circumstances of a particular business operation in arriving at a value.  This includes establishing how the business compares to others within its industry.  Rules of thumb are not a recognized valuation method because often there is insufficient information available about how the multiples were developed.  Some rules of thumb are supported by market data, and others are not.

If you are interested in researching rules of thumb for a particular industry there are a number of sources:

• 2009 Business Reference Guide, published by Business Brokers Press (www.bbpinc.com)
• Handbook of Small Business Valuation Formulas and Rules of Thumb/Third Edition by Glenn Desmond, published by Valuation Press, 1994.
• How to Value over 100 Closely Held Businesses, Fourth Edition, by Stephen M. Zamucen, MBA, CPA, CVA, ABV, CFE, published by The National Alliance of Consultants, Valuers and Analysts, 2002.
• Handbook of Business Valuation, Second Edition, edited by Thomas L. West and Jeffrey D. Jones, published by John Wiley & Sons, 1999.

Additional information is sometimes available from industry trade groups.

Use caution when using rules of thumb as some of them are dated and may not reflect current industry or economic conditions.

© 2009 Florida Business Valuation Group