Rule of thumb business valuation
- Business value with inventory
- $486,000
- Value of the earnings
- $450,000
- Price per dollar of earnings, all in
- 2.7
Every figure on this page is computed from the inputs you enter, by the method stated below it, including the multiple, which is yours. MultiplesBook publishes no multiples, no comps and no survey: the defaults are a worked example to replace with your own.
A rule of thumb business valuation is a multiple of earnings, and it earns its name because the multiple is the trade's folk wisdom rather than anyone's analysis: this many times earnings for a restaurant, that many for a practice. It is useful for exactly one thing, a first number before the conversation starts, and dangerous for one thing, being mistaken for the last. This guide is about how the rule of thumb is applied and where it breaks, and the free small business valuation on this site applies it to your own earnings at your own multiple with no account.
Try the free small business valuation Free to use. No account, no card, no trial clock.
The rule is a multiple, and the earnings have to be the right ones
Every rule of thumb is a multiple of something, and the something matters more than the multiple: a rule quoted on seller's discretionary earnings applied to net profit undervalues the business by the owner's salary times the multiple. Establish which earnings the rule was quoted on before applying it; the tool takes seller's discretionary earnings and says so.
The multiple is the trade's, not the site's
Rules of thumb come from brokers and trade associations who have seen deals close, and they move with the trade, the size and the year. A rule printed on a website is stale by the time it is read and blind to the town it is read in. The tool asks for the multiple so the rule applied is the one you were quoted, and shows the value at it.
Inventory is added, not multiplied, and the range matters more than the point
Inventory at cost goes on after the multiple, because a buyer pays for stock, not a multiple of stock. And a rule of thumb gives a range, not a point: run the tool at the low and the high multiple you were quoted, or use the report on this site, which takes both and gives the midpoint.
Rule of thumb business valuation: common questions
What is the rule of thumb for valuing a small business?
A multiple of the business's earnings, usually seller's discretionary earnings for a business the owner runs, with the multiple quoted by the trade rather than by any formula. The multiple depends on the trade, the size and the year, and this site publishes none; enter the one you were quoted and the tool applies it.
Is a rule of thumb valuation accurate?
It is a starting number, not an appraisal. It ignores the growth, the customer concentration, the lease and the owner's importance that a buyer will price in. Use it to know what conversation you are in, and use a valuer when a lender or a court has to rely on the figure.
Should I use revenue or earnings?
Earnings, in nearly every small business trade: a revenue multiple hides whether the business makes money. Some trades quote a revenue rule of thumb by habit; if yours does, convert it by checking what earnings margin the rule assumes, and the report on this site shows earnings as a share of revenue for that reason.
Will it do what you need for Rule of thumb business valuation?
Tell us what valuing your business needs and we will tell you straight whether MultiplesBook Pro does it today, whether it is coming, or whether you are better off with a valuer. A person reads these and replies.