Rules of thumb: Do they have a place in business valuation?
Abstract: Business valuation rules of thumb may offer a rough indication of value that can be used to satisfy a business owner’s curiosity or to serve as a “reasonableness or sanity check” on results derived from other methods. But they fail to capture the specific characteristics of a business that drive its value, and so are no substitute for a comprehensive, formal valuation. This article explains what constitutes a rule of thumb and points out these rules’ limitations. A sidebar offers an example of a rule of thumb in action.