A set of business valuation formulas derived from actual business sales transaction data and used to indicate business market value based on comparisons with similar businesses.
What It Means
Rules of Thumb are founded in the market-based business valuation approach. They seek to provide valuation guidelines by comparing the subject business to businesses of the same type that have actually sold.
Most Rules of Thumb indicate the business value as a multiple of an economic benefit, such as the business revenue or seller’s discretionary cash flow. For the specific business, this business value estimate is refined by providing some of the following additional inputs:
- Business inventory.
- Business furniture, fixtures, and equipment.
- Sum total of the business tangible assets.
Rules of Thumb are widely used by small business sellers, business buyers, and brokers to establish a reasonable value range, compare a subject business against competition, and rebut unreasonable business valuations or offers.