How to Grow a Profitable Business Valuation Practice

Several years ago, a business owner called Tim McDaniel seeking a business valuation to support the sale of her business to her son. She claimed to know already the value of the business – $2.5 million – and simply needed McDaniel to prove that value to the bank for a loan backing the deal.

[Reprinted with permission from Next-Level Accountants: Your guide to growing a firm of trusted advisors.]

“I asked her, ‘How’d you come up with that figure?’ and she said, ‘I belong to two country clubs, and that’s how much I need to keep up the country club lifestyle,’” recalls McDaniel, principal and director of business valuations at Rea & Associates, and the author of Know and Grow The Value of Your Business: An Owners Guide to Retiring Rich.

The actual valuation showed the business was worth closer to $800,000, and while the owner was furious, the son understood that it would be difficult to repay a $2.5 million loan to the bank when the business was only making a couple of hundred thousand dollars a year, McDaniel says. At 65, however, the owner didn’t have a lot of time to repair the situation so that she could generate the kind of money she wanted for retirement.

This client and experience taught McDaniel a lot about the importance of helping business owners understand their most valuable asset. And it holds a valuable lesson for anyone looking to develop a growing valuation practice: While the market for compliance-related valuations is static, opportunity abounds for valuation professionals to help business owners understand and grow the value of their biggest asset.

“It’s important for the business owner to know five or six years before retirement what the actual value is and ways to maybe improve that value,” McDaniel says. “We’ve been preaching a lot that your business is your biggest asset, so you should know what the value is. You shouldn’t guess at it, and you should have a plan to increase its value.”

Indeed, McDaniel’s firm has a valuation product called “Know & Grow Valuation,” which takes a plain-English approach to explaining valuations and helping owners develop strategies for maximizing business value. Selling valuations that are event driven (such as those related to death or divorce) is less challenging, but the Know & Grow Valuation projects are more enjoyable.

“It’s not driven by need; it’s driven by their desire and wants,” he says. “You’re teaching owners about one of their most prized possessions outside of their families. They get to understand their business more and what it’s worth.”

In addition, these engagements sometimes feed into other consulting areas of the accounting firm, such as IT, risk management, internal controls, tax solutions and operations improvement.

McDaniel has the following tips for growing a valuation practice aimed at business owners:

Have a solid “elevator pitch” ready. McDaniel recommends that you prepare to explain briefly the potential return on investment of a valuation. Among the areas where knowing the value of your business can be beneficial:

Estate and personal planning
Developing strategies to increase value
Buy/sell agreements
Assistance in determining the best exit strategy

Develop a valuation product that is cost effective. “For business planning purposes in our marketplace, people aren’t going to spend $10,000 to $15,000 for these kinds of valuations.” McDaniel’s “Know & Grow Valuation” product incorporates a more brief description of the business and the industry than a full-blown valuation for other purposes would include. “We don’t spend a lot of time and effort writing about the things they already know, and this reduces the cost of the valuation.” The valuation does, however, clearly explain all financial assumptions and all three valuation approaches in its calculation.
Focus on face-to-face selling. McDaniel says he does a lot of public speaking and CPE classes, provides thought-leadership articles and has a lot of lunches with prospects and professionals outside his firm who may provide referrals.
Train the firm’s partners on the importance of valuation. “Your best sales force is internal,” McDaniel says. “Make sure you engender the confidence of your partners that you’re competent, and train everyone to recognize opportunities.” Rea & Associates holds training to help others remember, for example, that if they’re talking to a business owner, they should ask how many owners there are. If there is more than one, the accountant should ask to see the buy-sell agreement. “Most of these agreements are old, not updated and have terrible valuation provisions in them,” he says, providing an opportunity for the firm to help.

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Mary Ellen Biery is a research specialist at Sageworks, a financial information company that provides financial analysis and valuation applications to accounting firms.

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