What’s Wrong with Rules of Thumb?
By John Garner, SBA, CMEA. Strategic Business & Commercial Brokers, Ltd (SBC)

When people balk on doing an appraisal, I like to tell them the following story.

“I think I understand what you’re saying. You just want a ballpark number?” They usually say “yes.” Then I say, “ let me tell you a story.” ………………………

Recently, I received a newsletter from the Institute of Business Appraisers. It gave actual final figures on the sale prices of 120 retail auto parts stores. What I thought was interesting was that a well-known “industry expert” that creates “rules of thumb” on businesses about as prolifically as the rabbits multiply in my back pasture, was quoted in this newsletter. This so-called expert says that the average auto parts store should sell for about 45% of the gross annual revenue. Now the report of these 120 sales showed that only two sold for exactly that amount! 46% sold for less and 52% sold for more. I happen to think my company is above average, how about yours? Well, let’s use another rule of thumb. Would you say 5%, 10%, or 15% above average? That’s pretty hard to say isn’t it? That’s why I always use an independent third party appraisal for the exiting clients I represent.

Let me give you another example. There may even be a good possibility that your business is even 25% more than the average. If the average American male is 6’ tall and I’m only 25% taller, that makes me 7 and half feet tall!! If you’re only 25% below average, that makes you 4 and a half feet tall! That’s not very realistic is it? That’s the problem with using rules of thumb in valuing businesses. It doesn’t take into account over nine different methods of evaluation that my third party appraiser uses. By the way, you want to know what the range of sales were for the Auto Parts Stores? The lowest sold for only 11% of annual sales and the highest sold for 138% of annual sales! Do you want to roll the dice and take a chance on a rule of thumb?