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December 19, 2006 The Rule of Thumb
I recently attended the AICPA Business Valuation conference in Austin, Texas. Three days of mingling with my peers and listening to some of the progressive leaders within the profession was eye opening and interesting. One question that struck a chord with me though was; do widely accepted rules of thumb provide reasonable valuation results? This also led me to ask myself, do the use of rules of thumb do the business valuation profession justice? For example, discounts for lack of marketability commonly range from 20 to 30 percent. However, much of the data prominently utilized and accepted as the basis for these discounts is flawed and can be misinterpreted.
It is important to the evolution of credible and defensible business valuation practices not to let the tail wag the dog. I.e., business valuation analysts should determine and utilize methodologies based on reasonable conclusions from underlying data that has been carefully considered. Business valuation analysis should be skeptical of the many rules of thumb that are essentially simplifying complex issues. Decisions on business valuation should be based on analysis, not what will be most easily explained to and accepted by a tax court.
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