What is a Business Valuation, and How Much Does it Cost?
In order to understand What a Business Valuation Costs, we need to understand the fundamentals of a Business Valuation. What the service entails and what value does it provide, from there you can identify a cost for that valuable service.
Business Valuation is the process of finding an objective measure of the business’ sale price or total inherent value. While differing valuation methods can adjust the scope based on their applicability to the case facts (i.e., some are based on the cash flows or income generated in the future, and others purely on net-asset-based metrics), the fundamental meaning and purpose of business valuation remain the same.
These objective methods of valuation help business owners in many circumstances: measuring growth over time, serving as an inducement to invest, due diligence on a potential sale (buy or sell), or during legal proceedings. All of these are some—but by no means all—circumstances in which business valuation is necessary.
What Does a Business Valuation Look Like?
Without diving into a methodology we’ll cover in a future post, standard valuation processes tend to follow similar sequencing when you outsource to experts. The reason for this is that they operate using an industry-accepted framework, trying to achieve a baseline quality of valuation.
- Consultation: this helps the firm get to know you and your needs in order to build a plan of action for the proceeding steps
- Data collection: a critical stage, the firm’s data collection means diving into your financial statements and working with you to identify hidden value and assets, such as intangibles. This stage of the process includes both quantitative and qualitative data.
- Research and education: some methods require an in-depth understanding of local market forces and industry norms, so the best firms will ensure they understand both the market scope for your business and how your competitors’ assets and liabilities compare
- Risk analysis: no investment is free of risk, and your business needs to have its risks accurately identified and quantified
- Execution: this is the number-crunching phase, in which steps 2, 3, and 4 feed complex, tailored models to determine your accurate business value
- Report finalization: the due diligence portion, this step is the firm’s chance to double-check facts and assumptions, then package the final report in a comprehensive and defendable deliverable
- Delivery: this is the final step, and the firm should present the report in its entirety while allowing for follow-up questions and refinement, if necessary. The best firms will also ensure that you can maintain a line of communication moving forward for further questions or assistance
What Impacts the Cost of Business Valuation?
Although not the most universal answer, the simple fact is that business valuation costs vary wildly depending on a few key factors:
Size, Complexity, and Scope
The larger the business and the more business units, assets, debt, complex capital structures, and other balance sheet items to factor in, the costlier a business valuation will be. Industry and type of business matter greatly, too.
Industrial, manufacturing, retail, or inventory-heavy sales companies tend to be easier to value. The high number of physical, tangible assets means that the firm can quantify each value to arrive at a total, objective valuation.
Software, data analytics, and many technology firms tend to be harder to value and, thus, more expensive, as they require more expertise. Intangible assets like brand identity, data, intellectual property, and similar tend to be more challenging to price accurately.
Suppose you go a cheap route and self-value or use your local accounting agency and misprice your intangibles or can’t justify the number. In these cases, you’re doing yourself and your business a disservice. That difficulty means soliciting advice from experts in business valuation and intangibles is critical, and this is particularly true if you need the valuation to stand on its merits during sale negotiations or in court.
And, like intangibles, if your firm has a complex capital structure that includes advanced debt or equity instruments like convertible bonds or warrants, then valuation will be more difficult and require expert assistance commensurate with complexity.
If you elect to self-evaluate your business value, the highest cost will be your time—assuming you value it correctly. If you misvalue the business, you will almost certainly pay an opportunity cost later, and/or an actual cost, if the end number is part of negotiations or proceedings. This would be considered putting a sign on your back, inviting the IRS or opposing attorney to attack.
A low-cost route is working with a local firm to conduct business valuation as part of standard accounting packages. This is feasible—especially for tiny businesses that primarily operate locally or regionally—but the likelihood of your local CPA struggling with correctly valuing your business rise exponentially alongside your company size and scope. And, as with self-valuation, the time and opportunity costs quickly outweigh the financial costs if you go this route.
Finally, outsourcing to a reputable valuation firm is often the priciest but most cost-effective option for all businesses. If you choose correctly, the firm stakes its reputation on its analytical accuracy, potentially saving you thousands or even millions of dollars from improper taxation, penalties, and additional fees. You also save time when you work with professionals exclusively valuing businesses in a way that lets you focus on what you do best, which is, of course, operating your business.
What Does a Business Valuation Cost?
Again, valuation costs vary according to many factors. And, if you outsource to a reputable service, they’ll tailor the price to your situation rather than use a blanket pricing model.
But there are a few commonalities in pricing structure that allow business owners to envision a general cost based on their circumstances.
Fixed-price structures are common for firms that apply cookie cutter techniques, regardless whether your business valuation needs are very simple (and in this case you will probably overpay) or if they are complex or serious purposes, such as tax compliance or litigation (and in this case the product simply won’t be sufficient, which increases your risk for additional costs later).
Hourly pricing applies when data is disorganized, complex, nuanced, deep financial analysis is required, or the product must be highly defendable, such as in litigation or divorce proceedings.
Starting at the bottom, using a valuation software may be as little as $500-$1,500
- For the simplest businesses conducting a valuation for internal exploratory purposes, a quality valuation can be as low as $3,000-$5,000
- For the same simple business that needs a valuation to submit to the IRS for, say, estate tax purposes, the cost can be as low as $6,000-$7,000
- For businesses that increase in size and complexity, with multiple business units, valuing minority interests (e.g., 40%), or various instruments such as preference shares or warrants, this can quickly increase to $15,000-$20,000 or more
- Should you wish to have a large, brand name accounting or consulting firm conduct the same valuation, this could easily cost upwards of $50,000-$100,000 or more, (but this is not where the value play is)
What you need to do is ensure you receive the right product for your valuation needs, and have it justified by the appraiser regarding the value you will receive.