Company Valuation Rule of Thumb: 8 Simple Methods for Quick Business Valuation

Do you want to know approximately how much your company is worth without immediately hiring an expensive consultant? Rules of thumb provide an initial orientation and allow for a quick assessment of the company’s value. In this article, we present the 8 most important rules of thumb for business valuation and explain when each method is best suited.

Table of Contents

1. Why Use Rules of Thumb for Business Valuation?
2. Overview of the 8 Most Important Rules of Thumb
3. Payback Period Formula
4. EBIT Multiplier Method
5. EBITDA Multiplier Method
6. Revenue Multiplier Method
7. Asset-Based Valuation Method
8. Customer Value Method
9. Reproduction Cost Method
10. Funding Round Multiplier
11. Calculating Company Value: Which Method Fits Your Business?
12. Limitations of Rules of Thumb and Advanced Methods
13. Frequently Asked Questions

Why Use Rules of Thumb for Business Valuation?

Before diving into the details of each formula, let’s clarify the benefits of using rules of thumb in business valuation:

• Speed: Rules of thumb allow for a first estimate within minutes
• Cost-effective: Can be applied without external consultants
• Comparability: Enable an initial industry comparison
• Reference Point: Provide a starting value for more in-depth analyses
• Simplicity: Can be used without extensive financial knowledge

Rules of thumb offer a preliminary orientation but are not a substitute for a comprehensive business valuation, especially in complex transactions such as a company sale.

Overview of the 8 Most Important Rules of Thumb

Valuation Method	Formula	Suitable For
Payback Period	Company Value = Net Profit × (4–7 years)	Established companies with stable profits
EBIT Multiplier	Company Value = EBIT × 5	Companies with stable earnings, low capital intensity
EBITDA Multiplier	Company Value = EBITDA × 4.5	Capital-intensive companies with stable profits
Revenue Multiplier	Company Value = Revenue × (0.5–3)	Growth companies, startups without profit
Asset-Based Valuation	Assets – Liabilities	Companies with high fixed assets, liquidations
Customer Value	Value per Customer × Number of Customers	Subscription businesses, recurring revenues
Reproduction Cost	Cost to fully re-establish the business	Young companies with low complexity
Funding Rounds	Last Valuation + Growth Premium	Startups after funding rounds

Payback Period Formula

The payback period method is one of the most intuitive approaches and is based on the question: “How quickly does the investment pay off for the buyer?”

Formula:

Company Value = Annual Net Profit × (4 to 7 years)

Suitable For?

• ✅ Established companies with stable profits
• ✅ Companies in stable markets
• ✅ Companies with low capital intensity
• ❌ Rapidly growing or shrinking companies
• ❌ Unprofitable companies

Example Calculation:

A craft business generates the following figures:

• Revenue: €150,000
• Expenses: €110,000
• Net Profit: €40,000

Calculation:

• Lower bound (4 years): €40,000 × 4 = €160,000
• Upper bound (7 years): €40,000 × 7 = €280,000

The company value lies between €160,000 and €280,000.

Tip: For fluctuating profits, use the average of the last 3–5 years, weighting the current year more heavily.

EBIT Multiplier Method

The EBIT multiplier is a commonly used method that takes operating profit before interest and taxes and multiplies it by an industry-specific multiplier.

Rule of Thumb Formula:

Company Value = EBIT × Industry Multiplier (typically: 5)

Suitable For?

• ✅ Companies with stable profits
• ✅ Companies in established markets
• ✅ Companies with low capital intensity
• ❌ Rapidly growing or shrinking companies
• ❌ Loss-making companies

Example Calculation:

A service company reports the following:

• Revenue: €1,000,000
• Operating Costs: €800,000
• EBIT: €200,000
• Industry Multiplier: 5

Calculation:
Company Value = €200,000 × 5 = €1,000,000

Important: Choosing the correct multiplier is crucial. For current, industry-specific multipliers, we recommend our overview of valuation methods.

EBITDA Multiplier Method

The EBITDA method considers earnings before interest, taxes, depreciation, and amortization and is especially suitable for capital-intensive companies.

Formula:

Company Value = EBITDA × Industry Multiplier (typically: 4.5)

Suitable For?

• ✅ Capital-intensive companies
• ✅ Companies with high investments
• ✅ Companies with stable profits
• ❌ Rapidly growing or shrinking companies
• ❌ Loss-making companies

Example Calculation:

A manufacturing company reports:

• Revenue: €2,000,000
• Operating Costs (excluding depreciation): €1,400,000
• EBITDA: €600,000
• Industry Multiplier: 4.5

Calculation:
Company Value = €600,000 × 4.5 = €2,700,000

This method is particularly useful when companies apply different depreciation methods, as it neutralizes these effects and allows better comparability.

Revenue Multiplier Method

The revenue multiplier method is especially suitable for high-growth companies and startups that have not yet achieved stable profits.

Formula:

Company Value = Annual Revenue × Industry Multiplier

Multipliers vary significantly by industry:

• Retail: 0.3–0.8
• Manufacturing: 0.5–1.5
• IT/Software: 1.0–3.0
• SaaS Companies: 2.0–15.0 (depending on growth rates)

Suitable For?

• ✅ High-growth companies
• ✅ Startups without profit
• ✅ Companies with clear scaling potential
• ❌ Established companies with stable profits
• ❌ Capital-intensive industries with low margins

Example Calculation:

An e-commerce company:

• Revenue: €500,000
• Industry Multiplier: 1.0

Calculation:
Company Value = €500,000 × 1.0 = €500,000

While some industries use the simple factor “revenue times two,” there are strong variations. In e-commerce, multipliers between 0.5 and 3 are common, depending on growth rate and margin.

Asset-Based Valuation Method

The asset-based valuation method is based on the actual value of assets minus liabilities.

Formula:

Company Value = Tangible and Intangible Assets – Liabilities

Suitable For?

• ✅ Companies with high fixed assets
• ✅ Companies in liquidation
• ✅ Companies with low earnings
• ❌ Companies without significant tangible assets
• ❌ Service companies with high earning power

Example Calculation:

A manufacturing company with the following values:

• Machinery and Equipment: €800,000
• Real Estate: €1,200,000
• Inventory: €400,000
• Liabilities: €900,000

Calculation:
Company Value = (€800,000 + €1,200,000 + €400,000) – €900,000 = €1,500,000

The asset-based valuation method offers a conservative valuation and is particularly suitable for companies with valuable tangible assets.

Customer Value Method

The customer value method values a company based on the worth of its customer base and is especially suitable for subscription and service models.

Formula:

Company Value = Customer Lifetime Value × Number of Customers

Suitable For?

• ✅ Subscription businesses
• ✅ SaaS companies
• ✅ Companies with high customer retention
• ❌ One-time sales businesses
• ❌ Companies with high customer churn

Example Calculation:

A software-as-a-service company:

• Average Order Value: €50 per month
• Average Order Frequency: 12 times per year
• Average Customer Lifetime: 5 years
• Contribution Margin: 30%
• Customer Acquisition Cost: €200
• Number of Customers: 500

Calculation:

1. Revenue per customer over lifetime: €50 × 12 × 5 = €3,000
2. Contribution margin per customer: €3,000 × 30% = €900
3. Customer lifetime value: €900 – €200 = €700
4. Company value: €700 × 500 = €350,000

This method is often applied in e-commerce companies and online shops, where the customer base often represents a significant portion of the company’s value.

Reproduction Cost Method

This method calculates what it would cost to rebuild the company from scratch.

Formula:

Company Value = Tangible + Intangible Assets + Infrastructure + Operating Resources + Setup Costs

Suitable For?

• ✅ Young companies
• ✅ Companies with clear, quantifiable assets
• ✅ Not too complex business models
• ❌ Large, complex companies
• ❌ Companies with strong brand identity

Example Calculation:

A small manufacturing company:

• Tangible Assets: €1,280,000
• Intangible Assets: €550,000
• Infrastructure and Operating Resources: €80,000

Calculation:
Company Value = €1,280,000 + €550,000 + €80,000 = €1,910,000

This method provides a good benchmark for “make or buy” decisions: Is it worth buying an existing company or building a comparable structure from scratch?

Funding Round Multiplier

This method uses the valuation from the last funding round as a basis and adjusts it according to progress made since then.

Formula:

Company Value = Valuation after Last Funding Round × (1 + Growth Factor)

Suitable For?

• ✅ Startups after funding rounds
• ✅ Growth companies
• ✅ Recently valued companies
• ❌ Established companies with stable cash flows
• ❌ Companies in crisis situations

Example Calculation:

A technology startup:

• Post-money valuation after last funding round: €10,000,000
• Progress since last round (growth factor): 10%

Calculation:
Company Value = €10,000,000 × (1 + 0.1) = €11,000,000

This method is particularly practical as it builds on an actual market valuation and adjusts it according to company development.

Calculating Company Value: Which Method Fits Your Business?

The choice of the right valuation method depends on various factors:

By Company Stage

Company Stage	Recommended Methods
Startup/Founding	Reproduction Cost, Revenue Multiplier
Growth Phase	Revenue Multiplier, Customer Value, Funding Rounds
Established Phase	EBIT/EBITDA Multiplier, Payback Period
Maturity/Consolidation	Asset-Based Valuation, EBIT Multiplier

By Industry

Industry	Typical Valuation Methods
Craftsmanship	Payback Period, EBIT Multiplier
E-Commerce	Revenue Multiplier, Customer Value
SaaS/Software	Revenue Multiplier, Customer Value
Manufacturing	EBITDA Multiplier, Asset-Based Valuation
Services	EBIT Multiplier, Payback Period

When considering business valuation from the buyer’s perspective, preferences may differ from those of the seller.

Limitations of Rules of Thumb and Advanced Methods

Rules of thumb provide a quick overview but also have limitations:

• Simplification: Complex relationships are strongly reduced
• Historical Focus: Future potentials are often insufficiently considered
• Industry Dependence: Multipliers vary greatly by industry
• Individual Factors: Unique company characteristics are rarely included

For a more comprehensive valuation in important decisions such as a company sale, consider advanced methods as well:

• DCF Method (Discounted Cash Flow): Values the company based on future cash flows
• Income Approach: More detailed consideration of future earnings
• Due Diligence: Comprehensive examination of all relevant company areas

For important decisions, it is also advisable to involve an expert who can professionally guide the valuation process.

Frequently Asked Questions

How do I calculate company value based on revenue?

Company value based on revenue is calculated using the formula “Company Value = Revenue × Industry Multiplier.” Multipliers vary widely by industry and typically range between 0.5 and 3, sometimes higher in high-growth technology sectors.

Is the rule of thumb “Company Value = Revenue times two” accurate?

The formula “Company Value = Revenue × 2” is a highly simplified rule of thumb that can serve as a rough guideline in some industries. In reality, multipliers vary significantly depending on industry, profitability, and growth rate. In low-margin sectors such as grocery retail, the multiplier can be well below 1, while in high-margin technology sectors it can exceed 5.

Are there free calculators for business valuation?

Yes, there are various free online calculators for an initial business valuation. These are usually based on the rules of thumb presented here. For a first estimate, you can also use our online business valuation tool. However, keep in mind that such tools only provide a preliminary orientation and cannot replace a comprehensive professional valuation.

Which valuation method does the tax office use?

The tax office typically uses the simplified income approach according to §§ 199 ff. BewG. This combines a sustainable annual income with a capitalization factor set by the Federal Ministry of Finance. This method is relevant for tax purposes such as inheritance or gift tax. In practice, the value determined this way can differ significantly from the actual market value.

Which valuation method is used on the TV show “Shark Tank” (“Die Höhle der Löwen”)?

On the TV show “Die Höhle der Löwen,” revenue multipliers and customer value-based valuations are frequently used. Investors often combine these methods with a DCF analysis for high-growth startups. Actual valuations depend heavily on the company’s development stage, growth potential, and industry. Typically, investors take a very forward-looking approach and consider scaling potential.

How reliable are rules of thumb in business valuation?

Rules of thumb provide an initial orientation but are only conditionally reliable. They can serve as a starting point to estimate a rough range. For important decisions such as company sales, acquisitions, or major investments, they should be supplemented by more comprehensive valuation methods and, if necessary, professional advice. Especially for complex companies or volatile markets, results from rules of thumb can deviate significantly from the actual market value.