Business Valuation Rules of Thumb
Business  brokers and other professional intermediaries              use business  valuation rules of thumb to help sellers price their               businesses for sale.  These "rules" are very useful for appraising  nearly every small business,              however they are gross  simplifications and should only provide a              general idea of a  suitable price range for a particular              business.

If  a rule of thumb is used to value a business, some              type of  earnings multiplier makes the most sense to prospective               buyers.  It directly addresses the buyer's motive to make money to  achieve a return on              investment.  Sales multiples mean  nothing unless they can be translated into earnings. 
 Two areas of confusion are inappropriate comparisons to investment real  estate or to stock market earnings              multiples.  Real estate  is often priced at 8 to 10 times its net operating income.  Stock  market prices are              often as much as, or even more than, 20  times earnings.  These two comparisons do not              work for  small businesses primarily because the risk of owning a               small, closely-held, privately owned business is thought to be much               higher than owning either real estate or publicly held stock.  A  business has lower              liquidity than real estate and stock,  and running a small business              is also a lot tougher than  managing an office building or a stock              portfolio. 
 To determine an appropriate earnings multiplier, the following              questions must be taken into consideration: 

 How is the business doing in terms of earnings?  What are the average                 earnings per year in the last three to five years?  What  are the future                projected earnings?
 How is earnings calculated?  Should it include or exclude the owner's  pay and perks,                interest expenses, depreciation, and  taxes?  What about those one-time                expenses that may be on  the books?
 How do you choose the right earnings multiplier to value the business?   What is the                multiplier based on?  Most people can agree  that the multiplier varies based on the                risk of the  business, but how can risk be measured?
 What about the various tangible and intangible asset values?  Do we  include the real                estate, equipment, vehicles, and  inventory?  Is there a separate value                for a seller's  agreement to consult with the new owner after the sale?  What about                 non-compe