Thursday, January 16, 2014

The Dangers of Rules of Thumb in Business Valuation

Without doubt the number one question, I'm asked in CFOCare's valuation practice is what rules of thumb do you use in your valuation.  This is a dangerous line of questioning and one that often leads to great disappointment when valuations come in lower than indicated...(OK, I admit sometimes they come in higher!)

Nevertheless the questions persist, so here's an extract from the Business Reference Guide:

IndustryValuation Rule of Thumb
Accounting Firms100–125% of annual revenues

Auto Dealers (New Cars)

0–10% of annual     sales + inventory
Day Care Centers45–50% of annual sales
Dental Practices60–65% of annual revenues
Distribution / Wholesale in general50% of annual sales + inventory

Engineering Services

40–45% of annual revenues

Grocery Stores (Supermarkets)

15% of annuals sales + inventory

Hardware Stores

45% of annual sales incl. inventory

Landscape Businesses

45% of annual sales
Machine Shops55–65% of annual sales incl. inventory

Remember at best, these are "directional" and are unlikely to apply unless your business is EXACTLY AVERAGE!