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.
There are many advisors who think they can tell you what your business is worth. The truth is nobody knows what your business is worth unless they are familiar with the sale of small businesses and have done a prodigious amount of homework on your particular business. An advisor who helps you must be able to explain the discounting factors. The ability to judge how risky your business is comes from understanding and experience in the marketplace of business sales and form lengthy review of your particular business and the markets it serves. You control the process Whether you are a seller or a buyer, the best strategy is to take control of the process yourself.