This discounting procedure is altered if a business is heavy in real estate or other long-lasting tangible assets. It is often wise, in these cases, to value these tangible assets separately. A company with significant tangible assets is theoretically less risky. Sometimes that portion of the value represented by tangible assets is discounted at a lower risk rate, or at a rate representing the cost of borrowed money to purchase those assets. Find a rule of thumb that makes sense If you ask around for advice on what a business is worth, you may hear several rules of thumb.
Rules of thumb are very hard to defend unless they make sense to buyers.
A rule of thumb based on earnings is best because it addresses the buyer's interest in a return on investment. Most buyers are probably willing to listen to an argument based on how fast the original investment will be returned in the form of earnings. Rules of thumb between three and five times projected earnings projected annual earnings, for example, mean that a buyer's original investment will be paid back in three to five years. But watch out when the rules of thumb get thrown around too loosely. People love to use rules of thumb because they appear to offer simple answers to tough questions.