Is There a "Standard" Way to Value a Business?
- Ernest Bednarz
- 7 days ago
- 3 min read
There’s a popular belief that valuing a business is like plugging numbers into a spreadsheet and out pops a definitive price tag. There is no one standard method of valuation, business valuation is far more nuanced - and context matters.
The Roles of Rule of Thumb (ROT)
In valuation, rules of thumb (ROTs) are generalized guidelines based on industry norms and past experience. They’re quick, easy to apply, and can provide a ballpark estimate when time or resources are limited. You might hear something like, “Cafés usually sell for 1.5 to 2.5 times their annual earnings.”
But here's the catch: ROTs are only starting points. They’re not meant to replace a detailed, context-specific valuation. Just as every business is different, so too is its value. Averages are just that averages, and your business's value may be much higher or lower.
Business Valuation: A Blend of Data and Judgement
Valuation is as much an art as it is a science. While data provides the foundation - revenues, profits, assets - judgment fills in the gaps that numbers alone can’t answer. Overlaying the qualitative facts over the quantitative data is where the science and art of the valuation process blend together.
Let’s look at an example to illustrate how this plays out.
Bean & Co vs. Grind Coffee House
Suppose two local coffee shop chains, Bean & Co. and Grind House Coffee, are up for sale. Each company operates three locations in similar neighborhoods, using similar equipment, with comparable overhead costs.
On the surface, you might expect them to be worth roughly the same. But let’s dig deeper:
Bean & Co. has developed a strong brand, and a loyal customer base, and consistently earns glowing reviews. Their locations are busy throughout the day, and their baristas are known by name.
Grind House Coffee, while similar in size, struggles with consistency. Their foot traffic is lower, customer reviews are mixed, and staff turnover is high.
Let’s say both businesses generate roughly the same revenue; $1 million annually, but Bean & Co. has a 20% profit margin, while Grind House runs closer to 10%.
Same Assets, Different Outcomes
Although the two companies are operating similar models in the same sector, one is clearly outperforming the other. Bean & Co. has higher earnings, lower risk, and greater brand equity. If we were to apply a rule of thumb of 2x to 4x earnings, Bean & Co. might reasonably sell for 4x, while Grind House might only command 2x.
That difference is driven by judgment - an analysis of business fundamentals, risk, growth potential, and industry trends. The company specific metrics that move the valuation away from the averages.
Risk & Resilience Matters
Now, consider a downturn in the economy - say, a 20% drop in discretionary consumer spending. Bean & Co., with its strong customer loyalty, may take a hit, but it’s likely to stay profitable. Grind House, already operating on thinner margins, might break even or lose money.
When buyers assess value, they’re not just buying today’s numbers - they’re buying future earnings, resilience, and reliability. That’s why two seemingly identical businesses can have very different valuations.
So, Is There a Standard Way to Value a Business?
Not really.
While rules of thumb provide a useful starting point, they should always be adjusted based on:
The business's actual financial performance
Market conditions
Industry risks
Competitive positioning
Brand value
Growth potential
Each valuation requires a tailored approach. The right multiple or method isn’t found in a rule of thumb - it’s discovered through thoughtful analysis and experience.
That's why it's crucial to have an expert business valuator who can use their industry insight, careful judgement and valuation experience when it's time to value your business.
Whether you're planning for your succession, transferring ownership, or simply planning for the future of your business, using a Chartered Business Valuator (CBV) is key to making the process smooth, simple and much more reliable than a rough rule of thumb.
Book a free discovery call with us today to learn how we can help you answer that age-old question "What is it worth?"
Malahat Valuation Group specializes in business valuation and real estate appraisals to owners of privately owned companies and their professional advisors.
When owners need to leverage, sell or reorganize their assets, we answer the age-old question "What is it worth?".
We provide our clients and their advisors peace of mind by preparing professional valuations that stand up to scrutiny from lenders, the Courts, and the Canada Revenue Agency.
Malahat Valuation Group Inc.
(250) 929-2929
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