Rule of Thumb or Industry Multiplier Method
This approach adopts the value of the business as relative to an “industry standard”.
Generally, the multiplier would be applied to either the profit of the business or its
turnover. For example:
 Accounting practices may apply their value as so many
cents in the Dollar of Gross Fees;
 Travel agencies generally adopt a multiple of gross fees;
 Some retail business general a multiple of net profit plus
plant & equipment.
Franchises are a business format that lends themselves to this method. For the
majority of franchises there is both a primary and secondary market. By identifying
and understanding these markets there is a reasonable basis of comparison by
which to establish valuation parameters for businesses within a particular franchise
group.
The problem with adopting these industry standards is that they are really only
applicable to those businesses that operate to an industry average.
The multipliers offer no benefit or discount for those businesses that are either
above or below the standard.
Also, in applying a standard industry method, the price should be compared to an
alternative methodology to ensure the merits of the business investment. For a
purchaser, it may be necessary to borrow or invest funds, and accordingly essential
that profits can be earned, and the investment is capable of being recouped.
©AVANTIA 2007
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