Discounted free cash flow (DCF) and earnings excess based valuation techniques are the fundamental to correctly valuing businesses. That said businesses can also use rules of thumb to quickly value their businesses. Using rules of thumb is a great approach to get a quick and dirty estimate before conducting deeper financial analysis.
Rule-of-thumb valuation is a guideline that businesses owners and business brokers use for a particular industry or line of business to value a company. There are rules available for almost every type and size of business in existence. Most of these rules are based upon multiples of an economic benefit such as earnings, cash flow or annual revenue. Check with your industry associations for rule of thumb formulas for buying or selling a business.
Some examples of rules-of-thumb used to value businesses are:
- Accounting firms are valued at 100-125% of annual revenue
- Dry Cleaners are valued 2-3 times adjusted cash-flow or 70%-100% of annual revenue
- Gourmet coffee shops are valued at 40% of annual sales + inventory
- Food shops are valued at 30% of annual sales + inventory
- Gas Stations (w/o C-Store) are valued at 15–20% of annual sales + inventory
- Law Practices are valued at 90–100% of annuals revenues
- Restaurants (Full-Serve) are valued at 30–35% of annuals sales + inventory
- Insurance Agencies are valued at 125–150% of annual revenues
- Grocery Store (Supermarket) are valued at 15% of annuals sales + inventory