What to consider when pricing business valuations
A recent survey by Pepperdine University found that 64 percent of business owners intend to transfer their ownership interests within the next 10 years. For those considering selling their business, a valuation professional could be seen as friend or foe – either delivering the good news that their business is worth what they anticipated (or more), or possibly relaying a much-needed wake-up call.
As a financial services professional, this potential wave of business sales creates a timely opportunity to expand your client base. But winning new valuation clients may actually be the easy part of the job. Pricing business valuation services may prove to be more difficult, particularly for those individuals or firms that are still relatively new to providing the service in this period of high demand for valuations.
While there is no tried and true rule for pricing a business valuation, there are a few important factors to keep in mind to ensure that you keep your services in line with the competition.
What type of valuation is this? Valuation engagement or calculation engagement? A variety of circumstances may drive a client’s need for a valuation, aside from the sale of a business. Divorce, succession or estate planning or a dispute among partners could demand for this type of service, so it’s important to immediately identify the type of valuation – a valuation engagement or a calculation engagement. From there, you can best determine the amount of work necessary to produce an engagement to meet your client’s needs, as well as take into account the professional standards required.
What method of business valuation calculation is preferred or necessary for this client? Along the same lines as the above factor, the method used to arrive at your valuation calculation will assist in determining the amount of man-power involved to deliver for your client. The methods not only matter to your bottom line, but the client’s as well. The same survey from Pepperdine cited that roughly one in every three business-sale engagements for brokers over the last 12 months ended without a transaction. Unrealistic asking prices were a major factor in the failed deals.
Know your competition. Outside of the engagement-specific factors to consider when quoting a client for a business valuation, it’s key to understand the landscape in which you’re working. Do you have a pulse on how your primary competition within the market prices their engagements? Do they bill hourly, or do they offer their clients a flat-fee rate? While your firm doesn’t have to match their pricing structure, it is worth understanding why they do what they do, particularly if the competition has been conducting business valuations longer.
Geography plays a role in pricing as well. In a market like New York or San Francisco, where everything from a pizza to a home is more expensive, business owners expect to pay a heftier price tag for outsourced services. The flip side of that logic, of course, is that if your Toledo-based firm follows the pricing model of E&Y in Los Angeles, you’re likely not to be in line with the local competition and could be losing valuable valuation business because of it.
Is this engagement likely to offer repeat business? Some firms will consider a discounted price on a standalone project, such as a business valuation, if the client is primed for additional services or consulting. Valuations are often a great jumping off point for further business advisory services. If your client finds himself in a position of a lower than ideal calculation, be prepared to ask exploratory questions about the goals of the business owner to get a better sense of how you may be able to steer them where they want to go with advisory services. The value of a valuation can extend beyond the initial project for the savvy financial pro.
Consider these factors next time you’re ready to price a business valuation project and be prepared for the wave of new opportunities to sail your way. For additional information on maximizing opportunities for your firm, listen to a recording of the recent Sageworks Valuation Solution webinar, “Where is the value in doing business valuations?”
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