Rule of thumb (sector benchmark)

A rule of thumb is a sector valuation benchmark, empirical and quick, that expresses the value of a business or goodwill as a percentage of revenue, a multiple of an earnings aggregate or an amount per operating unit, such as the number of covers, beds or contracted customers. Such benchmarks are widely used for retail and Business goodwill (business goodwill), where professional practice provides reference ranges by activity.

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Their appeal lies in their simplicity: they give a first order of magnitude and an anchor in a negotiation. Their limit is just as clear: an average benchmark ignores location, real profitability, lease quality or dependence on the operator, all factors that sometimes move an asset's value far from its sector average.

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For example, a restaurant business commonly trades at around 70% to 90% of annual revenue: for 800,000 CHF of takings, the benchmark places value between 560,000 and 720,000 CHF, a range then refined for location, lease quality and actual profitability.

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A rule of thumb therefore never replaces a substantiated valuation. In practice, it serves as a consistency check: an appraiser tests the benchmark result against a Discounted cash flow (DCF) method and the Transaction multiples method, in order to triangulate a defensible value range rather than rely on a single ratio.