Business Valuation Rules of Thumb

A valuation “Rule of Thumb” is a mathematical relationship between price and one or more variables, based on experience, observation, hearsay, or a combination of these, applicable to businesses within a specific industry. The Business Reference Guide published by Business Brokerage Press is a common resource for people involved in valuing, buying or selling privately held businesses. The guide contains rule-of-thumb and pricing tips on hundreds of types of small businesses. Below are a few of the price/sales rules of thumb presented in the guide:

Industry	Valuation Rule of Thumb
Accounting Firms	100–125% of annual revenues
Auto Dealers (New Cars)	0–10% of annual sales + inventory
Day Care Centers	45–50% of annual sales
Dental Practices	60–65% of annual revenues
Distribution / Wholesale in general	50% 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 Shops	55–65% of annual sales incl. inventory

Be aware that there are disadvantages to using rules of thumb, and they should never be relied upon by themselves to appraise a business or price a business for sale.  For example, applying one of the above rules of thumb to your company would assume that its cost structure, risks and growth prospects are identical to the industry average company. This is almost never the case! We use rules of thumb, when available, as a sanity check on values produced by accepted business valuation methods, and the Business Reference Guide is often the first place we look.