Myth #8 - Most businesses in the same industry sell for the same multiple. This and other rules of thumb generated by the "department of hear-say".
On a few occasions, we have met with a business owner and provided them with an evaluation of their business and a suggested offering price for marketing purposes. If our suggested offering price is lower than the vendor’s expectations, they have on occasion provided us with some obscure rule of thumb which of course trumps any type of economic approach we may suggest. When we have tried to demonstrate logically to the vendor that the rule of thumb doesn’t make economic sense we are usually told that we do not understand this vendor’s industry. So is the vendor right? Should we ignore an economic approach and adopt the vendor-accepted, but little-known rule of thumb.
Maybe yes, and, maybe no. Rule-of -thumbs of course do exist in a variety of industries. The problem is that these rules assume the company that is being valued is operating within the “norm” reflected in the rule of thumb and that current economic conditions are also similar to those reflected in the rule of thumb. Therefore a sanity check is required.
Our reality is that while rules-of-thumb do exist, it is only the most unreasonable vendor or purchaser who will ignore an economic approach to value.