11 Feb Outside Valuations: To Fee or Not to Fee
In the world of post 2008 recession business brokerage, things have changed in the last few years. The brokerage industry as a whole is smaller and competition is higher with fewer businesses that are ready to sell. In that environment, up front fees are a hard sell to selective sellers in today’s market. So does it make sense to use an outside (qualified) valuation firm and charge a fee for appraising a seller’s business before you list it? Is there a certain size business that makes it worth the effort (and the fee)?
To answer those questions, it might be a good idea to first understand the benefits of the valuation to both the seller and the broker. Let’s start with the benefits to a broker. If your client has agreed to pay for an outside valuation, you have immediately established commitment, which is the most important variable in the broker / client relationship. Once you have commitment, you need credibility in the listing price and a qualified independent valuation firm offers that. Prospective buyers are more likely to engage in negotiation when they know that the price has been established by an independent source. Finally, a credible valuation establishes a starting point for negotiation between the buyer and seller and ultimately reduces the negotiation time. Further, it’s a great tool to have when SBA lending is a viable option for financing.
For the seller the benefits are pretty straightforward. The last thing a business owner wants to do is sell his/her company for less than what it’s worth. A credible valuation prevents this from happening. Since business owners tend to overestimate the value of their business in anticipation of the sale, a valuation also brings a reality check to the business owner allowing them to make an informed decision on whether the time is right to sell. If not, the appraiser can guide the seller to improve the key value drivers than can help increase the company’s value. Finally, while there is no empirical data to support this theory, a seller has a better chance of selling the company with an independent valuation than without.
With the benefits that a business owner and broker can realize through an independent valuation, charging a fee (and getting the business owner to pay it) would seem pretty easy, but with businesses just starting to get back to level performance, it’s more difficult in today’s market. The good news is, even qualified valuation guidance is not that expensive. There are plenty of firms out there that offer valuation services for reasonable fees (usually $5K or less). The size of the company should not be a factor when considering a valuation for the reasons mentioned above. The question that should be asked is – “is it worth it to you to spend a few thousand dollars to assure you have maximized the value of what is probably your largest asset?” If not, the commitment is not there and then the broker has a decision to make. In today’s business brokerage climate, good listings are out there but are hard to come by, so quality is more important than quantity (i.e. better to have 10 listings in a given year and sell all 10 than have 50 listings and sell 10). It starts with commitment.