Most people only consider business valuation when planning to buy or sell a company. However, business valuations have many other purposes, from financial reporting and litigation to divorce and succession planning. Knowing the cost of valuing your business can help.
So, how much does a business valuation cost? To understand what a business valuation costs, we must understand the fundamentals of valuing a business. Let’s delve into what a business valuation entails and the factors that drive the cost of one.
What Does a Business Valuation Entail?
When outsourcing business valuation to an expert, the process follows a similar sequence of steps:
- Consultation: This helps the valuation firm understand your business and needs to build a plan of action.
- Data collection: At this stage, the firm dives into your financial statements and works with you to identify assets and hidden value.
- Research and education: Some methods require an in-depth understanding of industry norms and local market forces.
- Risk analysis: This step involves identifying and quantifying risks.
- Execution: After completing the above, the valuation company crunches numbers and uses custom models to determine your business’s value.
- Report finalization: The appraiser double-checks facts and presents a final comprehensive report.
- Delivery: Finally, the firm presents the entire report while allowing for follow-up questions and refinement.
Factors That Determine Business Valuation Cost
Generally, a professional business valuation involves two fee types: an appraiser’s compensation and additional fees paid to one or more specialists. For example, an appraiser may hire a tech expert to provide insights into the value of software assets.
The appraiser may also charge a flat fee or hourly rate. Companies charging a fixed price tend to use cookie-cutter techniques, regardless of whether you need a business valuation for simple or more complex purposes, such as litigation or tax compliance.
Valuation companies will often charge hourly rates when dealing with disorganized data or complex situations that require deep financial analysis or when you need a highly defendable valuation, as in divorce cases or litigation.
However, most reputable appraisal companies will tailor their fee structure to your needs rather than use a fixed pricing model. The following are some of the most common factors impacting the cost of a business valuation:
Business Size, Complexity, and Scope
A large business with more business units, debt, assets, and complex capital structures will cost more to value than a small business. The type of business and industry matters, too. Complex capital structures like preference shares, convertible bonds, or warrants require expert assistance that costs more.
Companies with many physical, tangible assets, like those in manufacturing or retail, often prove easier to value.
Many software, tech, and data analytics firms with intangible assets like intellectual property, data, and brand identity cost more to value. Intangible assets present greater challenges to measure accurately because they lack physical form.
As a result, you need more time and expertise to price such companies accurately.
Valuation Approaches
Valuations that require multiple approaches cost more, and an appraiser may use one or all three of the methods outlined below:
Asset Approach
In this type of valuation, the appraiser assesses balance sheets to determine a business’s value based on the fair market value of its assets net of liabilities. Costs may be lower since that value primarily involves assessing tangible assets such as inventory, equipment, and property.
Costs can increase if the job involves valuing complex assets or intangibles, such as trademarks or patents.
Income Approach
This approach values a business based on its ability to generate income. It compares an asset’s specific cost with its profit and revenue.
The costs for using this approach may be higher because of the financial analysis required to forecast future cashflows, assess risk, and calculate appropriate discount rates.
For example, valuing a startup with uncertain revenue projections may involve extensive financial analysis and modeling, raising the valuation cost.
Market Approach
Using this approach, business valuation professionals base a company’s value on the recent market value of similar companies. They also consider sales of other companies of a similar size (total revenue). Costs may vary depending on the availability and quality of comparable data.
For example, valuing a niche business with few comparable companies in the market may require more research and effort, thus increasing costs.
DIY vs. Outsourcing
If you opt to do a business valuation yourself — assuming you get it right — your highest cost will be your time. An incorrect business valuation will most certainly come with a cost. You could face legal trouble or taxation issues as a result.
The lowest business valuation cost route would be to use valuation software or hire a local firm to value your business as part of standard accounting packages. This may work, especially for small businesses operating regionally or locally.
However, the likelihood of your local accounting firm struggling with correctly valuing your business rises as your company grows in size and scope. Similar to self-valuation, the time and opportunity costs associated with this approach quickly surpass the financial costs.
Finally, you’ll often spend the most to outsource the job to a reputable valuation expert, which is also the most cost-effective option. Any reputable firm will stake its reputation on its analytical accuracy, potentially saving you plenty from additional fees, penalties, and improper taxation.
Working with an expert could also save you time by allowing you to focus on what you do best: running your business.
Appraisal Standards and Credentials
Qualified business appraisers comply with the Uniform Standards of Professional Appraisal Practice. They also follow standards set by the Institute of Business Appraisers and the American Society of Appraisers.
How Can a Business Broker Help?
If you need help finding a qualified appraiser, a business broker can help. They’ll explain the process in detail and help you gather the records needed to complete the appraisal.
A competent broker can also identify strategies to improve your company’s performance and potentially increase your business valuation before selling your business. The broker will utilize their knowledge about the marketplace to provide strategic insight into how best to ensure successful outcomes.
Most brokers maintain a network of investors, CPAs, and attorneys involved in business transactions, allowing them to find potential buyers for your business much faster than if you were working alone. They can also determine whether a buyer has the financial resources to buy your business.
Get a Professional Business Valuation From Murphy Business Brokers
Now that you understand the factors affecting business valuation cost, you must ensure you receive the right product for your valuation needs. Otherwise, you could be shortchanging yourself without even knowing it. Hiring seasoned valuation experts with a track record of accuracy and expertise helps you avoid that scenario.
At Murphy Business Brokers, we rely on our professional appraisers, all of whom are experts in business valuation services and business transfers.
Our staff adheres to industry standards and employs proven, peer-reviewed valuation methods to develop defendable opinions of value.
Call our Murphy Business Brokers office in Sacramento, CA, at (916) 675-3883 to get answers to any further questions, learn more about our process, and schedule your next business valuation and appraisal with our highly experienced team.