If you just need a rough idea of value, can you get by with an industry “rule of thumb”? Perhaps, but keep in mind such rules usually cannot help you with the following:
- Valuing start-ups and/or poor performing companies.
- Determining the amount of excess or deficient cash or working capital.
- Adjusting for non-operating assets.
- Converting the indicated value to a stock equivalent.
- Determining a proper rate of return that matches the actual risk of the investment.
- Adjusting for personal expenses.
- Determining if the owner is recording all of the company’s cash sales.
- Reconciling the value to actual, previous sales in the company’s own stock.
- Adjusting for an owner’s discretionary spending.
Although the use of industry “rules of thumb” is not uncommon among valuation professionals, it typically serves only as a quick “sanity check” – and the result usually still must adjust for one or several of the above. The end result is often quite different than the initial value provided by simply applying the rule of thumb to the Company’s sales, earnings, or other metric.
Importantly, rules of thumb provide only a wide range of values, leaving the user not only to address the above bullet points, but also to decide whether the final revenue multiple, for example, should be .8 or 1.5.
The good news is that Cirrus can provide a basic analysis for circumstances that do not require a full valuation. Call us to find out how we can help.