Rules of Thumb are considered to be a theoretical market approach method based upon units of comparison. Rules of Thumb can be considered a quick approximation of value; however, reliance on them can be dangerous and present several problems because they are not very specific. Most rules of thumb are based upon averages and assume the business being valued is an “average” business. Therefore, if the subject business is not average, then Rules of Thumb will not properly determine the value of the subject business.

Rules of Thumb can lead to confusion about the business being valued because they are based on limited knowledge about the actual transactions. The purchaser of a business often acquires the assets or the equity. The purpose of the business valuation (i.e. divorce, estate planning, charitable giving, merger, sale, acquisition, etc.) frequently varies, therefore, reliance on a rule of thumb that arrives at a value for the equity of the business might misstate the value of the assets of a business or vice versa.

Many if not all rules of thumb assume an “average” business. Limited knowledge of the data and the actual transactions can create a lack of understanding about the purchase price paid for a so called comparable business. This lack of knowledge of actual transactions will often result in an undervalued or overvalued business. Little knowledge of the differences in the profitability, management, capital structure, location, etc. can cause a misstatement in the value that the purchaser of a business often needs to consider prior to executing a purchase of a business. It is extremely important that the analyst have adequate knowledge of the actual transactions. Lack of knowledge concerning the specific terms of the transaction make it impossible for the valuation analyst to make any appropriate adjustments required for specific circumstances.

Mr. Golden has years of experience, education and training as a Certified Public Accountant (CPA), Certified Valuation Analyst, Certified in Financial Forensics (CFF) and Dipolmate of the American Board of Forensic Accounting (DABFA) and can assist you in valuations for your business.

A.M. Golden Accountancy Corporation offers a free initial consultation - To speak with Mr. Golden immediately, please call his direct line by dialing (760) 444-1913.  If you’d prefer, you may also send an email: al@amgolden.com