Rules of Thumb

There are situations that justify a quick and easy business valuation based on Rules of Thumb, rather than a lengthy and costly business valuation.  To apply Rules of Thumb, the first step is to determine seller discretionary earnings (SDE).  This is calculated by adding back certain non typical expenses as well as non cash expenses to the net operating income.  This calculation is the first and most important step when valuing a business and should only be attempted by an experienced business broker.  A miscalculation of SDE will produce an inaccurate business valuation.

Once SDE is determined, a multiple of that number can be applied to arrive at the value.  The multiple of SDE is determined by numerous comparable sales.  Multiples can vary from a very low number to an astronomical number, depending upon potential earnings, patents, national franchise, etc.   In addition, inventory needs to be considered along with real estate value, if applicable.  The valuation and sale of a business is a complicated process and should be left to specialists dealing with these type of properties.