One of the most frequently asked questions about business valuations is: “How much does a business valuation cost?”
This is a complex question with no easy answer, though there are numerous articles online that attempt to assign a range for the average cost of a business valuation. The ranges quoted, however, are so large as to be useless in estimating what the cost will be for any specific case.
That’s because a number of factors impact the cost of business valuation services. The size, type, and complexity of the business; the purpose for the valuation; the company’s ownership structure; and other variables will determine the complexity of the valuation and, in turn, the cost of preparing it. In this article, we’ll look at all the different factors that can affect the cost of preparing a business valuation report. In general, you can assume that a valuation that involves more complexity in any of these factors will result in a higher business valuation cost.
Factors That Affect Business Valuation Cost
A business valuation starts with understanding the business and the purpose of the valuation, and carries through data collection to selecting the proper valuation approach and calculating a value. The cost will be a combination of all of these factors—the type of business (private, small, or large and complex), the type and amount of data gathered and evaluated, and the valuation method or methods most appropriate for calculating the value.
In a previous article, we outlined the steps in performing a business valuation:
- Understand the purpose of the valuation.
- Determine the basis of value.
- Determine the premise of value.
- Review the historic performance of the business.
- Determine the future outlook for the business.
- Determine the valuation approach to use.
- Apply discounts.
- Arrive at a determination of value.
There are several steps in the process where greater complexity can arise. From the outset, the purpose for the valuation may determine how costly it will be to perform.
Business Valuation Steps With Associated Cost Factors
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Purpose for the valuation: The purpose of the valuation may have the biggest impact on cost.
For example, if a venture capital group is seeking a valuation of a business for the purpose of investment (or alternately, if the business is seeking a valuation to attract venture capital), the valuation may rely primarily on the market approach to compare the Subject Company’s performance to other businesses in the industry; using the market approach for investment decisions is common practice. Under this scenario, the value will be established through comparison to multiples for other similar businesses, using information available to the public—which reduces the amount of effort the appraiser will have to put into gathering information and making calculations to determine the Subject Company’s value.
If, on the other hand, the purpose of the valuation is the proposed acquisition of a local wireless telecommunications network by a regional or national wireless service provider, the valuation is likely to be complex. It will involve multiple valuation approaches to account for both the tangible and intangible assets, replacement costs and depreciation of physical assets, and more to arrive at an accurate value.
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Time/effort associated with data collection and analysis: Collecting data about both the Subject Company and similar businesses can be a challenge. If the subject is privately held, there will be little public data on it. To even compare a private company with a similar public company’s market multiples requires a lot of analysis of the Subject Company’s internal business records. In addition, a private business may lack standardization in its financial records, requiring more time and work to reconcile in order to determine the company’s true financial condition. Family-owned businesses may also have some intermingling of personal and company assets; the appraiser will have to sort through and disentangle the assets to get a true picture of value.
Even if the Subject Company is a public company, it can be difficult to find data on comparable businesses. The harder it is to get the data needed for the valuation, the more time it will require to find it—and the more it will cost.
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Type/number of valuation approaches required: As previously noted, the purpose of the valuation can determine whether one, two, or all three valuation methods are appropriate and necessary. The three valuation approaches or methods were covered in detail in a previous article, but to summarize, they are:
- The market approach, which relies on comparison to similar companies to estimate value
- The income approach, which assumes that the present value is equal to the present value of future cash flows the business will generate throughout its operating life
- The cost approach, which presumes that the value of the business is the value of its accumulated tangible assets
Each of the methods has advantages and drawbacks, which is why more than one valuation approach is often necessary.
The market approach can be quicker and easier, but it is less precise, since no two businesses are exactly alike; when comparing companies of similar sizes in the same industry, there are still likely to be significant differences that impact the value of each.
The cost approach provides solid data about the value of tangible assets, but most businesses are worth more than just their physical assets. This approach by itself does not give an accurate value for an operational business, which is likely to also have intangible assets (intellectual property, customer relationships, and more) that add to the enterprise value.
The income approach involves deep analysis of the Subject Company’s financials and the performance of other companies in the industry to project future earnings and profits, but it relies heavily on assumptions about the future which may or may not be accurate.
Because each approach has strengths and weaknesses, a combination of approaches often provides the most accurate estimation of value. Although a complete valuation involves additional steps such as determining the basis of value and calculating discounts, factors related to these three steps of the valuation process will have the biggest impact on the business valuation cost.
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How much does a business valuation cost? It depends.
Due to the factors outlined above, the cost of compiling a business valuation report for your business or business assets depends on both the individual business and the business situation or reason for seeking the appraisal. (Tweet this!) Without an understanding of both, a valuation expert will not only be incapable of valuing the business—he or she will be unable to estimate the cost of performing the valuation.
At Valentiam, we have expertise in all aspects of business valuation and can assess the factors that will drive costs in performing your business valuation. Every business and situation is different, so we customize the valuation approach to arrive at the most accurate, defensible value we can provide; this means that the price for performing the valuation will be customized as well, to match the level of difficulty involved in the appraisal.
Need help determining the value of your business?
At Valentiam, our valuation specialists are experienced in all valuation methods acceptable in accounting practice. We bring collective decades of expertise in valuation and transfer pricing to every project. Give us a call to see how we can help you with your business valuation and transfer pricing needs.
