Can I use industry rules of thumb to set my asking price?

Nothing prevents you from quoting a sector rule of thumb, whether a multiple of earnings or a share of revenue, when you start talking to buyers. The question is how much weight it can carry. A rule of thumb is one figure for a whole sector, and your business may differ from others in that sector in ways you may need to explain. This page is about using such rules, not about what any particular rule says for any sector.

What the rule leaves out

BDC says a business’s price is fundamentally determined by its perceived value to a potential buyer, a blend of financial performance, growth potential and strategic fit. It lists further factors, including how easily the business can run without its owner and the condition of tangible and intangible assets. A single sector rule does not look at any of those factors for your business in particular.

How valuators use multiples

BDC describes market multiples as applying valuation ratios drawn from comparable transactions or public market data to a company’s financial metrics, such as revenue or EBITDA, comparing it to similar companies that have recently sold or are publicly traded. It lists that as one of the methods a Chartered Business Valuator typically uses, alongside discounted cash flow and asset-based valuation, and recommends engaging one for an independent assessment and a realistic market-perceived price.

Value is not the same as price

BDC’s guide to selling points out that a company’s fair market value is not necessarily the price it will sell for. The final price can be affected by market conditions, the buyer’s strategic interests, due diligence, financing, your eagerness to sell and your involvement after the sale. It also notes that owners sometimes have a mistaken perception of their company’s value and that a valuator’s report can support your position when you negotiate.

A workable approach is to use the rule of thumb only as a sense check against a documented valuation, and to be ready to explain any gap. Ask any advisor which comparable sales a figure rests on, how earnings were adjusted, and what the figure assumes about your future role.