If the earnings are variable or declining, the value is on the lower end. A thorough investigation of the financial information is required to uncover the true earnings capability of the business. Again, if the earnings are stable and growing, a higher multiple is used. If the earnings are variable or declining, a lower multiple is used. At this level, Buyers may be paying for market share, rights to patents and processes, additions to product lines, or the benefits of strategic or administrative consolidation.
Most industries have one or more rules of thumb.
However, they can vary widely and in most cases do not give an accurate value of a business. The business valuator will be able to decide what is the most relevant information about a business and then make an informed decision about its value. Business valuation is as much an art as a science. While the business valuator does employ standardized formulas and methods to calculate value, he works from assumptions that are based on his experience in the marketplace and his familiarity with similar businesses. This process includes the selection of the most appropriate risk and return variables.