How Much Does A Business Valuation Cost?
This is the most asked question we get when we meet with a client. There is nothing wrong with that. However, in order for us to determine the precise cost of the valuation engagement, we need to get an idea of what it entails. Most valuation analysts require the most recent tax returns and/or financial statements first, to assess the level of complexity of the work they need to perform in order to give an accurate quote to the client. In that assessment, the valuation analyst takes into consideration several factors.
Factors that Determine the Price of a Valuation Engagement
Analysts consider several factors before quoting a price to the client. Some of them include:
The purpose of the engagement
How fast the report is needed
The Industry of the business
The size of the business
The age of the business
The availability of documents
The type of report to be issued
1- Purpose of the Engagement
This is critical and is the first question we ask a client when we first interact. What is the purpose of the valuation? Is it for the sale of the business? for estate tax? for gift tax? for a divorce case? Etc. That information allows the valuation analyst to know from the client’s response what type of report should be issued and what level of details should be in that report.
For example, if a client wants a valuation for the sale of his business, essentially, the owner of the business wants to know what is the price they should be asking potential buyers of his/her business. The analyst will look for data of comparable companies that sold in that area recently to have an idea of the price range but, a serious analysis needs to be done to take into account the specifics of the client's company in determining the final price. Here the analyst is issuing a calculation of value report.
This is different in a valuation for estate tax which is more detailed and requires a higher level of quality assurance as that report will likely end up in the IRS's hands. This is a determination of a conclusion of value that will be the basis for a tax bill issued by the IRS to the estate administrator. Detailed reports are the most expensive of all the reports types.
2- How Fast Is The Report Needed?
Typically, a valuation engagement, in the best of conditions, takes between 3 to 6 weeks. In some cases even more. Obviously, a premium has to be added on a valuation engagement that a client wants to be done faster than what it normally takes. The analyst will, of course, make sure he or she can deliver the report within the time frame requested by the client without sacrificing the quality of work that must be excellent at all times.
If it is not possible for the valuation analyst to meet the requirements of the client, there must be a negotiation with the client to give more time to the analyst otherwise; the analyst may not accept the engagement.
3- The Industry of the Business
Not all industries are equal. Some industries have a lot more data available to analysts than others. This important factor must be taken into consideration in determining the cost of the valuation work. When data are scarcer, the analyst has to spend more money to find reliable data from some databases that are sometimes prohibitive. This additional expense should be considered in the pricing of the work. In some extreme cases where data are not available, the analyst may not accept the engagement
4- The Size of the Business
Large companies that are complex are more difficult to value compared to lesser ones. Not all large companies are complex. The term large here refers to the revenues generated by the company annually. A $30 million revenues firm with complex structures will be more expensive than a $30 million firm that has a simple structure. Tax returns and other financial documents help the analyst determine the complexities of the company and thus how much work and time are needed to perform the engagement.
5- The Age of The Business
Valuing a start-up is more complex than valuing a 20-year-old business. In the first case, we do not have enough company historical financial data to accurately predict the future (projections) of the firm. In the second case, the analyst has 20 years worth of historical financial data to work with. This makes his work easier.
Some valuation analysts do not value start-ups because of the great uncertainty in the value they may arrive at, that could be subject to disagreements with the client.
6- The Availability of Documents
This is a major issue with many clients when they are looking for a valuation of their business. The documents requested by the valuation analyst are critical to performing an accurate valuation of the business. When the analyst requests specific documents, it is very important for clients to understand that the value of their firm may be affected considerably if they do not provide the information the analyst needs. The authenticity of the documents is also critical because if the analysts determines that the documents are forged or falsified, that may cause the analyst to not accept them, and even in some cases stop the engagement altogether.
It is very important for business owners, especially closely held business owners, to have an accounting system in place and all their business financials in one place and in order. That helps them tremendously when they need to have a valuation done. The quality of the report and the value of their business depend on the quality and availability of the company’s records.
7- The Type of Report to be Issued to the Client
A report can be issued two ways to a client:
A written report
An oral or verbal report.
There are three types of written reports a valuation analyst can issue to a client. See table below.
The cost of an engagement depends also on the type of report the client wants. Obviously an oral or verbal report, in which the analyst gives the client the number he or she arrived at after all the analyses, is less expensive than a written report that the client can keep for future reference.
Achille Ekeu, MBA, CVA
President & CEO
The Washington Valuation Group
Achille is a Certified Valuation Analyst (CVA) member of the National Association of Certified Valuators and Analysts (NACVA) in the DC-MD Chapter. He provides valuation services for Estate and Gift Tax, Purchase, Sale of business, Debt Financing, Buy-Sell Agreements, and Litigation Support in Divorce/shareholders disputes cases. He can be contacted by phone at 240-274-9570 or by email at firstname.lastname@example.org.