Handbook of Business Valuation

By Thomas L. West; Jeffrey D. Jones | Go to book overview

CHAPTER THIRTEEN
Rules of Thumb: What They Are
and How to Use Them

THOMAS L. WEST

A rule of thumb is a homemade recipe for making a guess. It is an easyto-remember guide that falls somewhere between a mathematical formula and a shot in the dark…. Rules of thumb are a kind of tool. They help you appraise a problem or situation. They make it easier to consider the subtleties of the topic at hand; they give you a feel for a subject…. Modern-day rule of thumbing is rooted in an overabundance of facts. The average person, confronted with a computer, volumes of data, and several Ph.D. dissertations often is as perplexed as a pioneer chemist trying to whip a little gunpowder without a formula.

from the Introduction to Rules of Thumb
(Houghton Mifflin, 1983) by Tom Parker

Rules of thumb may provide insight on the value of a business, business ownership interest or security. However, value indications derived from the use of rules of thumb should not be given substantial weight unless supported by other valuation methods, and it can be established that knowledgeable buyers and sellers place substantial reliance on them.

American Society of Appraisers Business Valuation Standards

Rules of thumb should not be used by themselves. However, rules of thumb may be useful in assessing the reasonableness of valuations

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