Business Brokers: Can You Charge for a Business Valuation?

Can I Charge for a Business Valuation??

We get this question from business brokers all the time. They know that valuing a business requires a good deal of their time – time that could be spent marketing businesses that they have already listed – and a good deal of money insofar as properly evaluating businesses requires access to a lot of data and access to that data costs money. Not unreasonably, many of them want to know if they can charge the client for the initial business valuation.

We value businesses all the time and for all sorts of reasons: bank and financing purposes, impending sales, estate planning, divorces, partnership dissolution, the death or disability of a major equity holder and the uncertainty of a lawsuit are among them. Many businesses need a periodic valuation to support life insurance-backed buy-sell agreements among the owners/partners. Some owners simply want an accurate assessment of where they stand; whether they are at the right point on the road to their particular goal or exit. In most of these cases, our valuation efforts are a profit center for us. However, when we’re asked about charging the client, the question generally refers to a client that the broker hopes will ultimately list its business for sale. That is the circumstance that this post is meant to address.

Here’s What We Found

When I first got started brokering and advising businesses, I did not charge for my valuations. In fact, in the early years of Worldwide Business Brokers, none of us charged our valuation clients. We assumed that business owners that came to us for a valuation would also list their businesses with us. What we experienced, though, suggested that we change our approach to this aspect of our business and realize we are selling a valuable service.

We discovered that many business owners who came to us seeking to learn what their businesses were worth had no intention of listing those businesses for sale with us. Some wanted to know just for financial planning, others wanted to know so they could brag at various cocktail parties and still others wanted to sell but their sister-in-law was a residential real estate agent and the owner wanted to give her the listing (which is tantamount to hiring an Ear, Nose and Throat guy to replace your kidney, but that’s another story and for a different post.)

Of course, most business owners that asked us to perform an evaluation had legitimate reasons and were considering selling. But that doesn’t mean that, once we performed and provided the valuation, we got the listing.

We’re usually the bearers of bad news at this point in the sale process. Most business owners – from the Main Street restaurant and the $5 million healthcare provider to the $15 million distribution and logistics company – have an exaggerated sense of their business’ value. The results of a professional valuation often disappoint. Some business owners accept the valuation and, even though they had hoped for a higher number, proceed to list the business for sale. Others get back to work building their business so as to achieve a higher value, often with our assistance as consultants and advisors. They plan to push the valuation up over the next few years, for example, and list the business for sale at that time at the higher valuation.

So…Can I charge for a Valuation??

The answer is, “absolutely”!

Look at it this way: All you have to sell is your knowledge and your time. You can’t give either away for very long and still feed your family and keep a roof over their heads. You’re providing a service – no different from your client’s accountant, financial planner, attorney or personal trainer.

Do we get push back when we quote a fee? Well, yes, but not very often… and not from serious business people.

For instance, in some areas, particularly rural areas where many people are unfamiliar with the concept of a business broker, some owners equate us with residential real estate agents that provide what’s referred to as a CMA (competitive market analysis) at no charge. But obtaining such an analysis requires little more than entering an address, number of bedrooms and baths, year built, square footage, lot size and a few other details into the local MLS database and voilà instant value. Press “print” and you have a nice little package, logo’ed-up sufficiently to impress the homeowner. Estimating the value of a business is far more time-consuming – your time – and, in most cases, costly – your money.

Similarly, we found that the smaller the business, the more resistant the owner is likely to be to paying for a valuation. While I’m unaware of any statistics or studies about this, my experience over my nearly two decades as a business broker causes me to believe that the owners of smaller businesses are hesitant for two reasons:

• First, such owners are as likely as not to be unaware of the existence of professional business brokers and, once we sit down with them, think we are similar to residential real estate agents. (In fact, they are very likely to call the agent that sold their home to them to discuss selling their business!)
• Second, the smaller the business, the more likely that the budget does not include a miscellaneous line item that would include a valuation fee and that the fee may amount to something close to what the owner takes out every two weeks.

How Do We Overcome the Push Back?

Most serious business people intuitively understand that we are providing a service and that it is reasonable that we be paid for that service. However, we still get push back now and then and we’ve had to develop some legitimate and non-confrontational ways to explain why we would expect to be paid.

The first is to explain that the databases we subscribe to – the ones that allow us to provide legitimate estimates of a business’ value – are costly. “Some subscriptions are monthly, others quarterly and still others annually”, we tell the owner, “but in order to provide you with a justifiable valuation of your business, we have to pay for these subscriptions.” In addition, somebody’s got to spend time doing the research, the calculations, the drafting and editing of the valuation report and, finally, print and bind the finished version. Some brokers have in-house staff for some or all of these tasks and that staff has to be paid. We go on to explain that we perform this service as a “loss leader” in the hope of getting the listing. That is, we don’t make any money on the valuation but we need to at least get most of our costs covered or, like any other company, we’ll be out of business in very short order. Laying out our costs like this has almost always taken the wind out of the owner’s objection.

Another justification we offer is that we will credit the valuation fee to the commission or success fee at sale. (And unless the business is extremely complex, i.e., with multiple locations, different divisions, numerous product lines or multiple currencies, we usually offer this anyway.)

By this time, after justifying our fee using the two points above, we generally have removed the owner’s objection. But if we’re still getting some push back, we explain that we cannot take the listing without knowing what the value is and offer to give them the contact information of one or two professional business appraisers while explaining that the fees for such appraisers are usually significantly higher than ours.

As this process plays out, we know that we won’t list every business whose owners contact us. But we have become adamant that, one, we won’t do a valuation without getting paid and, two, we won’t take a listing without a professional valuation.

Note the word “professional” in the previous sentence. We clarify that our definition of that word is a professional business broker or a professional business appraiser. There have been instances when a business owner tells us that his cousin, Milton, is an accountant and does the books for a dozen local businesses and Milton told him that the business is worth X. As some of our brokers in the southern US say, “That dog don’t hunt!”

Give me the Number!

Finally, and with apologies to my Indian readers, I believe it’s time to address the proverbial “elephant in the room”…. What can I charge?

Well, it depends…..

There are many factors to consider when establishing a fee for valuation work and all should be considered for each assignment. I don’t believe you can establish a standard fee – something that you can stick on your website or in your marketing materials – because there are just too many variables from business to business. As my daughter the fashionista tells me, “one size doesn’t fit all, dad.” Amen!

Factors to take into account when you consider what to charge include:

• Type/size of business           You’ll probably charge a baker with two shops a lower fee than you’d charge the automobile dealer down the street that he bought his two delivery trucks from because you’ll spend more time on the auto dealer. You’d probably charge a home healthcare provider with locations in 14 states a bit more than you’d charge a two-accountant firm for the same reason.
• Location          You might find that you’ll get more push back in rural areas than you will in more urban environments. You might charge different fees to the owners of a small hotel in Podunk, Indiana, Mengen, Baden-Wurtemberg or Yoshimo, Yamato than you would if that same hotel was located in Nu Yawk City, Frankfurt or Tokyo.
• Culture           No matter where you are or where the business is located, it is certainly possible that the owners are immigrants and that their native culture causes them to balk at paying for a valuation or to assume that the number you quote is a mere suggestion – a staring point in what usually will be a tedious and many times unsuccessful negotiation.
• Business Complexity             As mentioned above, the more complex the business the more complex the valuation is likely to be. The more time you will spend on it, the higher your fee should be.
• Competition   Professional business appraisers are usually your competitors in this arena. You can do an internet search for such appraisers and get a sense of what they charge. An appraisal – as distinct from a valuation – is generally much more thorough, retailed and, indeed, invasive than is a valuation. Hence the higher fees.

The Exceptions

There are, of course, instances when you might decide not to charge for a valuation. Legions of very small businesses struggle all the time and are only one or two significant setbacks from catastrophe.

It is not unusual to be approached by one of the owners of a 30 year-old business, started and run by a husband and wife, now in their 60s, that have been making a decent living over the years but hardly setting the world on fire and to learn that one of the spouses has suddenly become ill. The wife or husband is bewildered, if not distraught, and at wit’s end. They don’t believe they can carry on with life – let alone the business – without their spouse and business partner. They need to sell. They don’t know if they’ll have enough money for the medical bills, let alone enough to live on in the aftermath; they don’t know where to turn but for one damn big issue, they’ve turned to you.

Being a professional business broker requires, among other characteristics, ethics, professionalism, empathy, patience, honesty, trustworthiness, etc. It also requires a heart. Make sure yours is in the right place.

If you have any questions, leave them in the Comments box, below. If we get enough on the same topic, I may do a post or podcast tackling that topic specifically.

Finally, we’ve had several people ask if we have a course to teach them how to become business brokers. I’ve been thinking of putting together such a course and will do so if there are enough people interested in it. So, let me know your thoughts on this, as well.

Joe