Chapter 18
Rules of Thumb
Rules of thumb should hardly ever be relied on as a primary appraisal method. Having said that, if there are valuation rules of thumb for an industry, especially if they are widely recognized, they can be useful in a number of ways: as a “sanity check” on a valuation arrived at through other methods; as a means to estimate a ballpark range of value; and within certain industries and in certain litigation contexts, as supporting evidence in court.
Rules of thumb are often classified within the market approach to business valuation because they are thought to have their origins in transactions in the industry. However, their actual origins can vary from pure folklore to (rarely) actual transaction studies.
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