Valuation Fundamentals - What about valuation “rules of thumb”?

Sometimes a valuation multiple becomes popular in an industry and, rather than being recalculated each time based on new information, becomes an assumption.

In many cases, the valuation rules of thumb emerged due to lack of current profitability and low visibility into future profitability—and they proved to be too generous, which often happens with technology startups.

This said, there are business brokers who rely on them.

Suppose a company is so new that it has no revenue and no profit. How can it be valued?

This is called pre-revenue valuation, and there are several techniques for this. The most popular one is the Venture Capital Method, but there are several others.

While it is beyond the scope of this section to discuss pre-revenue valuation, it is an important topic and guidance is available.