THE RULE OF THUMB METHOD

Some businesses have well established rules of thumb for value. Typically these would be businesses where most of the revenue is in the form of recurring revenue. A good example of this would be the alarm monitoring business. Alarm monitoring companies have customers that pay a monthly or annual fee to have their home or business monitored. The revenue tends to be pretty steady. Someone wanting to purchase such a business might use a rule of thumb such as paying 2 to 3 times annual recurring revenue adjusted for things like the amount and quality of other kinds of revenue, historical attrition rates, the type of equipment at the customer have and the type of equipment at the alarm monitoring station and so on. The financial services business is another example of recurring revenue. Here the rule of thumb might be the amount of recurring fee or service revenue (trailers) or the quantum of assets under administration or both.