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Why Do Valuation Fees Vary So Much?

Why Do Valuation Fees Vary So Much?

Why Do Valuation Fees Vary So Much?

All valuations should meet the same standards no matter the valuation fee charged. All valuations should be conducted by a qualified appraiser, should conform with generally accepted appraisal standards, be consistent with the substance and principles of the Uniform Standards of Professional Appraisal Practice (USPAP), and the appraiser should have the experience and  background to make appraisals for the type of property being valued.

All valuations should perform the same analysis by defining the nature of the business and the economic environment, a review of the book value and the company’s financial condition, analyzing the earnings capability (or dividend paying capacity), a review of whether the company has goodwill or intangible value and a review of the pricing of similar companies. In addition, a valuation should determine if there are any restrictive agreements that might impact value. Some “valuations” might be software apps that are not valuations at all but are simply a “rule of thumb” or indication of general value. Credible valuations are specific and detailed and are drafted using several spreadsheets. In my opinion a credible valuation needs to be constructed from the bottom up on a spreadsheet as there are no shortcuts in reviewing the financial data that builds on one another and results in delivering a defendable valuation.

All valuations should utilize and apply accurate capitalization rates, accurate future cash flows and accurate peer comparisons when investigating the selling multiples. Often, I see valuations that do not establish what the company really does. For example, I saw a valuation of a franchisor of hair salons. The franchisor collects royalties from its franchisee salons and the franchisees operate their salons. The franchisor has long-term contracts with their franchisees and has a reoccurring royalty stream. The franchisor is acting more like a financial services firm but the valuation in which I am referring to, compared the franchisor to a single hair salon like they were a single salon themselves.

Another valuation example I saw was one valuation where a company had 70% of its sales from one product and 30% from another product with 75% of the profits coming from the product generating 30% of the sales. A company could be defined by the sales volume or by cash flow generation. I believe it more appropriate to define a company by how cash flow is generated as a prospective buyer is purchasing the future cash flow.  It is critical to understand where and how a company earns its cash flow and compare them to that peer group when looking at the selling multiples.

Pricing comes down to process and procedures used by the appraiser and common sense. Those valuation firms that have extremely efficient processes in place and can streamline the valuation procedures while delivering the valuation standards and analysis discussed previously, and apply the proper risk levels to the future benefits stream, have an advantage over the less efficient valuation firms. The more efficient valuation firms can either make more money or reduce their pricing and offer a value-based appraisal fee. Charging less does not mean the valuation is an inferior appraisal and charging more does not mean the valuation is a superior valuation.

In addition, the valuation client has different valuation purposes and the amount of supporting detail in the valuation report might be important and can vary. Does a valuation client need a depreciation schedule of all fixed assets; a gross profit contribution table on all product lines; a listing of detailed formulas a mathematician struggles to understand; a listing of every asset the company has purchased over the years; or a detailed analysis of seven or eight billion dollar public companies that are considered peers to the subject company and so on? Most valuation clients want options where they can decide the amount of detail they desire and still get a qualified valuation.

In conclusion, valuation fees are subject to these variables. All valuations should be qualified valuations that are ‘true valuations’ and not a ‘brokers opinion of value’.  I suggest all people seeking a valuation should have options to decide the various detail levels needed and find a firm that can deliver the valuation in an efficient manner.

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