In the world of pricing, there are simple models (e.g. cost plus a profit markup) and complex models (e.g. dynamic pricing algorithms based on real time supply and demand). Anyone who has ever purchased an airline ticket online knows that flight pricing is impossible to decipher. Fortunately, we can offer greater transparency and consistency on business valuation pricing! Like most professional service pricing models, the cost of a business valuation is primarily a function of the time it takes to do the work. The following factors affect the amount of work involved.
Ten Factors that Affect the Cost of a Business Valuation:
- Normalization – Most owner-operated businesses require an expert to normalize (adjust) the income statements and balance sheets. There are often discretionary, related-party, non-recurring, extraordinary or non-operating expenses that must be added or removed. Assets usually need to be adjusted to market values or removed. Owner compensation may need to be adjusted. Expenses commingled between businesses adjusted. Financial statements may have to be adjusted to accrual or industry standards. How long all this takes varies a lot; sometimes 10 minutes, sometimes 10 hours.
- Due Diligence – Some business models are easy to understand. Others require a deeper dive to understand the business and how it compares to the industry in which it competes, and its risks and opportunities. Getting up to speed requires more independent research and time with the CEO, CFO, CPA and others.
- Non-Operating Assets – Some owner-operated businesses own assets that are not required to run the business. For example, a vacation home on the books or cars that are owned by the business but are designated for personal use. We need to adjust to not burden the cash flows with these assets or expenses. Once adjusted, we need to separately value the assets or find a specialist who can.
- Forecast Complexity – Without access to a long-term financial forecast, we may need to spend time with management to develop one. Is the company at a steady state and if not, what amount of visibility does management have on the future of the business.
- Industry Niche – Businesses come in all shapes, sizes and flavors. Some companies compete in niche industries that aren’t covered by research firms and therefore require custom research to evaluate the company’s market opportunity and industry outlook.
- Intended Use and Users – Our website outlines the many different uses of a valuation, such as tax, financial reporting, buy-sell agreements and dispute resolution. The use and users affects standard of value, scope of analysis, due diligence and reporting, and those factors determine the amount of appraiser time required.
- Valuation Date – A current valuation date doesn’t require as much work as one that has long passed. Historical valuation dates require more due diligence to determine what was known and knowable at that date. For valuations related to potential business sales, sometimes business owners are unable to gather the information we request on a timely basis due to higher priorities. This results in having to adjust the valuation date which adds hours.
- Standard of Value – The standards of value for tax, financial reporting, shareholder oppression, marital dissolution and strategic acquisition are all different, and some are easier to work with than others.
- Interest Valued – Minority interests usually have to be evaluated for control and marketability attributes. Valuing interests in companies with complex capital structures (preferred or convertible shares) adds methodologies and reporting.
- Timeliness and quality of information – A simple but important factor. When we receive data quickly and it is concise and accurate, we can work faster. If we have to chase people for information or follow up every answer or document with more questions and requests to reach, projects take longer. Having to put down and pick up a project multiple times because we’re waiting for information is also a big time waster.
At Exit Strategies, our goal is always to provide the appropriate level of service (no more, no less) at a fair and competitive price. All of our valuation projects begin with a discussion with clients on 14 topics that helps us clearly understand their needs and propose the appropriate level of service. A valuation that uses the wrong standard of value for example may be cheap, but useless.
We quote a fee range for most of our business valuations, though litigation work is usually done on a straight hourly basis. In all cases we endeavor to work as fast and affordably as possible. By the way, when an appraiser quotes a fixed fee for business valuation work, there’s a good chance they plan to use the same cookie cutter methods and spend the same amount of time on your valuation no matter what they find, which is probably not in your best interest.
Exit Strategies values businesses for a variety of purposes including divestitures, mergers and acquisitions, buy-sell, business divorce, financial reporting, corporate restructuring and exit planning. If you have questions or need a business valuation, contact Joe Orlando at 503-925-5510 or email@example.com or Jim Leonhard at 208-912-0455 or firstname.lastname@example.org