Alternative Ways of Pricing Valuations

And Valuation Consultations

Business valuation reports are somewhat of a competitive product. We may not feel that way because of all the effort we put into them, but many clients do not understand the value to them and look at the valuation as a “mechanical” process. Additionally, there are many other valuation preparers that provide valuations at fees substantially below what a valuation professional might charge. Here is a discussion of some alternative ways of pricing valuations and consultation services, and presenting the value to the clients.

Business valuation reports are somewhat of a competitive product. We may not feel that way because of all the effort we put into them, but many clients do not understand the value to them and look at the valuation as a “mechanical” process. Additionally, there are many other valuation preparers that provide valuations at fees substantially below what a valuation professional might charge. Here is a discussion of some alternative ways of pricing valuations and consultation services, and presenting the value to the clients.

Competitive Providers

There are numerous professional organizations that provide certifications for those performing business valuations. This includes NACVA, AICPA, and ASA to name a few. There are also many other types of people that provide business valuations; these include: business and real estate brokers, investment bankers, accountants that prepare or assist clients with loan applications where a valuation is necessary for a business owned by the borrower, financial planners advising a client on retirement, or estate planning and attorneys preparing a will as part of an estate plan and who use a personal financial statement as a guide. Some bankers even provide a valuation when assisting customers with loan applications. There are also services that provide valuation reports after inputting customer data provided on a questionnaire.

Another form of competition are equally competent professionals that want to grow this part of their business, obtain critical mass in a specialty or in a particular industry, or bring in new work so a younger associate could build up their credentials with this experience. They could also be asked to bid during a period when they have excess time and this would fit in to fill a lull in work.

Uses of Valuations

There are many uses of valuation reports and these also factor into the acceptance of an engagement and the pricing of it. A valuation for a gift or estate tax return, unless a very aggressive position is taken, is relatively free from controversy with the Internal Revenue Service. However, it might be subject to intrafamily fighting as to the division of assets, the buy-out of an interest from an uninvolved family member, when a charitable organization is a beneficiary of a substantial bequest, or where key employees want to purchase the business.

Valuations for marital dissolutions, fair value buyouts, buy-sell agreements, transfers to successors, or even for a financial plan have different criteria and it is not unusual for there to be varying valuations of the same business by the same appraiser based on the standard of value, purpose of the valuation, and the date of the valuation.

There are many other uses of valuations such as for ESOPs, built-in gains, or fair value of assets on a financial statement, and each has separate criteria and protocols. Occasionally, industry “experts” present a percentage or multiple of revenues, gross margins, or profits as the value as a talking or starting point.

Nature of a Valuation

A valuation generally provides a value as of a certain date based on the predetermined criteria using the information provided. Occasionally, a range is provided. If valuations were so objective (and mechanical) then there should be very little differences between valuations prepared by different appraisers. However, there are usually great differences. How often is subject to conjecture, but every case, whether adjudicated or subject to settlement negotiations, usually have big differences. A good part of our revenue comes from rebuttal reports and rebuttals of those rebuttals ad infinitum.  

Since valuation amounts can vary widely, it is an indication that the services performed are not commodity type or objective, but subjective and subject to interpretation. Occasionally, even some of the facts as presented are subject to interpretation. This also means that the experience, skill, talent, imagination, creativity, and reasoning ability of the appraiser is an important element of the appraisal process. Thus, the client is getting a unique tailormade individualized service. Part of the valuation is the amount, but another part is the digestion of the data used and how it was applied, and how it could be used to identify value drivers, strategic value, little regarded features that could be built upon, and highly regarded features that might not add the value that would be expected from them.

Because of this, I feel it is important to have the right person selected to perform the valuation.

Deliverable of the Valuation

Valuation amounts can be delivered in many forms. These can be formal valuation conclusions, calculations of the value, worksheets with a variety of ranges, “made up” amounts or ranges with some caveats provided leaving the user to apply their own opinions, and even back of the napkin amounts. 

Many times I am asked to perform a valuation when all that is needed is an indication of the value of the business either for the owners own edification, as a starting point for a M&A discussion, for a financial plan or asset allocation construction, as a way to calculate the net that might be realized from a sale after all selling costs and taxes, for the start of a partner buy-out negotiation or for a newly drawn buy-sell agreement or a succession plan, or for an estate plan in determining the best way to proceed to make gifts or how much life insurance might be needed for estate taxes. Occasionally, a life insurance company needs a personal financial statement to validate or support the insurance amount. 

The details of some of these will be expanded upon in the pricing section that follows.

Pricing the Valuation

There are probably as many ways of pricing a valuation as there are clients that need the valuation. Each situation is different with different circumstances, dynamics, preparation, cooperation, availability of data, and time constraints.

The following are some typical ways of pricing our valuation services.

• A time-based fee with stated rates per hour for each person working on the valuation
• Same as previous but with a range, or minimum or maximum fee provided (comment: this creates a “fixed fee” in some manner)
• A fixed fee for the engagement
• A bifurcation of the project into sections or phases and a fixed fee for each phase. When I do this, I provide a topside amount that the entire project could cost if seen to completion. (Sometimes, this frightens away clients, but I would rather not get started with a project than get started and have serious problems later on with the costs going beyond a client’s expectations. Better they should know up front what to expect.)
• A minimum fee equivalent to the upfront retainer with added predetermined payments as the work progresses based upon benchmarks
• A fee based on value provided to the client which will be discussed at the conclusion of the assignment (This makes the appraiser a “partner” with the client and likely removes any independence and will disqualify the appraiser as an expert witness. It also leaves the payment in doubt since the client and appraiser could disagree on the value. Further, if no value was provided, this could mean the appraiser will not get paid at all [or just gets paid the initial retainer if there was one.])

While many clients, through custom, are conditioned to pay time-based fees, they are usually not happy with that since the fee is open ended with no certainty of the cost of the project. Also, in some situations the value to be provided is vague or not clear. Charging fixed fees places the risk of overruns on the appraiser, especially when there is considerable scope creep or client caused delays in providing data. Hourly based fees puts the risk on the client. When appraisers set a fixed fee, they should include a premium for removing the risk from the client.

A suggestion with fixed fees is a carefully written proposal or engagement letter with all details of the services fully described, including what is not included and the client responsibilities. Included will be the method of advising the client when added services are necessary, the pricing of it, and the timing of the client’s decision whether or not to proceed. The more care with this, the better the payment and the relationship with the client. In some cases, it is advisable to review the client’s data before providing the proposal. This could take time, but it is a necessary step to make sure you get it right.

Following is a suggested pricing method of fixed fees for valuations and valuation consultations. I believe these amounts represent reasonable prices but they could always be adjusted based on the appraiser’s circumstances. These are guides that can be used in pricing valuations. These prices do not cover defending a valuation or any other added services once the valuation report has been provided to the client.

Conclusion of value of a single company: 0.1% of the last fiscal year’s sales with a minimum fee of $10,000 and a maximum fee of $50,000 (or any amounts of your choosing). Therefore, the price for a company with $20,000,000 in sales would be $20,000. The deliverable would be the complete report.

Where there are related companies valued at the same time, the price for each added company would be 0.075% of sales.

Calculation of value: 65% of the fee for the conclusion of value. The deliverable would be the written calculation.

Valuation consultation: This is where the same information that would be requested for the calculation of value would be reviewed, the situation would be evaluated, the numbers run, and a valuation arrived at. These calculations would be used in a meeting with the client where every aspect of the valuation would be discussed including value drivers, growth trends or potential, potential strategic value with a discussion of possible buyers, current or possible exploitation of unique features, suggested starting asking price for a sale, and what the owners might net from a sale. However, nothing whatsoever would be provided to the client in writing. These meetings should be about a two-hour duration. Added meetings would be priced based on what has developed that created the need for a second or further meetings. The fee for this would be 50% of the fee for the conclusion of value.

Written notes and worksheets: I do not recommend providing anything in writing to a client other than the deliverables covered above which would have been prepared following full professional standards. Accordingly, I suggest no price for this. Stay away from this.

Using percentages of sales is a method of determining a fixed fee and also presenting alternative services your clients could choose from beyond the formal conclusion of value. You can use these percentages as a guide and compare them against reports you have previously issued, and see how they measure up and adjust the percentages accordingly. The purpose is to find a method of providing fixed fees to the client.

Conclusion

If you have a method that works and you are comfortable with, then stick with it. Otherwise, consider making some changes and you can evaluate the suggestions in this article as a start. Valuing businesses is a serious undertaking and helping clients to understand the decisions that lead to the final valuation amount is the method of providing substantial benefits to the client.

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Edward Mendlowitz, CPA, PFS, ABV, CFF, is emeritus partner with WithumSmith+Brown, PC, in East Brunswick, New Jersey. He has over 40 years of public accounting experience, is a licensed Certified Public Accountant in the states of New Jersey and New York and is one of Accounting Today’s 100 Most Influential People and is an adjunct professor in the Fairleigh Dickinson University MBA program. The author of 30 books, Mr. Mendlowitz has written hundreds of articles for business and professional journals and newsletters and presented over 350 CPE programs. He writes a weekly blog at www.withum.com/partners-network-blog.

Mr. Mendlowitz can be contacted at (732) 743-4582 or by e-mail to emendlowitz@withum.com.