Do you want to start a business valuation company? If YES, here is a complete guide to starting a business valuation company with NO money and no experience. Buying and selling of businesses is something that takes place on a daily basis in the world of business.
For every entrepreneur that is trying to exit a business or industry, there are dozens of potential investors willing to break into the industry as long as the industry is still viable and not an ailing one. But one service that both business sellers and potential business buyers can hardly do without is that of a business valuation expert or business appraisal expert as they are sometimes called.
It is the job of a business valuation expert to take a critical look at various factors and elements of the business, and use it to come up with a fair value or current worth of the business. This article will help you gather all the facts and information that you require for starting your own business valuation company in the United States, and also help you understand how to beat your competitors.
14 Steps to Starting a Business Valuation Company
Table of Content
- 2. Conduct Market Research and Feasibility Studies
- 3. Decide What Niche to Concentrate On
- 4. Know the Major Competitors in the Industry
- 5. Decide Whether to Buy a Franchise or Start from Scratch
- 8. Discuss With an Agent to Know the Best Insurance Policies for You
- 9. Protect your Intellectual Property With Trademark, Copyrights, Patents
- 10. Get the Necessary Legal Documents You Need to Operate
- 11. Raise the Needed Startup Capital
- 12. Choose a Suitable Location for your Business
- 13. Hire Employees for your Technical and Manpower Needs
- 14. Write a Marketing Plan Packed With ideas & Strategies
1. Understand the Industry
According to the US Market Research Report by IBISWorld, the business valuation industry is part of a $7 billion industry with an estimated annual revenue of about $4 billion, and a current annual growth rate of -0.8% between 2013 and 2018, and a forecasted annual growth rate of 1.3% between 2018 and 2023. There are about 136, 761 business valuation companies operating across the United States, and they employ about 148,311 persons.
Interesting Statistics About the Industry
Nearly every business will need business valuation/appraisal services at some point during the life cycle of the business, usually at the middle or end of the business’s lifecycle.
According to a report by BuyBizSell, one of the internet’s premier business and franchise for-sale marketplaces, around 7,842 small businesses are sold annually with about 70% of these businesses using the services of business appraisal experts to determine fair value or sales price of the business.
In the last 5 years preceding 2018, the number of IPO’s and business bankruptcies reduced, and this affected the number of contracts and revenue earned by business valuation experts. This led many industry players to quit the industry during the said period.
Is the Industry Growing or Dying?
Although the past five years were not attractive for players in the business appraisal industry, the future is expected to show more promise. Between 2013 and 2018, there was a decline in the growth rate and profitability of the industry because the rate of commercial and personal bankruptcies went down 50% in the United States.
Business valuation firms thrive when bankruptcy filing rates are high because then, they get to be called in to conduct a thorough appraisal of the individual or company’s assets. But due to lower interest rates, job growth and lower inflation rates, more American individuals and companies have been able to avoid delinquent payments that lead to bankruptcy filings.
However, there is expected to be a growth rate of about 1.8% in the industry between 2018 and 2023 because according to IBISWorld, there will be an increase in business investment rates and corporate profits.
There is also expected to be more demand for valuation services by business owners reaching retirement age, and divorcing couples who require business appraisal services as part of divorce proceedings.
Why You Should Start a Business Valuation Company?
One of the reasons why the business valuation industry is a promising one is that it has 60% higher profit margin than traditional accounting services. There are also diverse niches in the industry to specialize in. You can specialize in insurance valuations, market valuations, asset valuation, liquidation valuations, and dozens of other niches that are available in the industry.
The industry also has a very low level of competition due to the barriers to entry. Before anyone can be allowed to practice as a business valuation expert, they need to obtain professional certification.
They also need to possess a high level of technical expertise. The business appraisal industry is not one where any interested persons can just jump in, there’s a lot of professional, capital, and technical requirements involved. Hence the industry has very low competition.
The industry also earns a lot of revenue and profits (about $4 Billion annually) so low competition, and a high income makes it a very lucrative business for anyone who possesses the necessary certifications, technical know-how, and experience that qualifies them to start a business valuation company.
2. Conduct Market Research and Feasibility Studies
Demographics and Psychographics
The business valuation/appraisal industry serves a diverse range of clients from different industries and sectors. According to IBISWorld, client demographics for the industry are as follows:
- Buy-Sell Agreements – 40%
- Divorce Proceedings- 10%
- Tax Planning- 10%
- Bankruptcy Proceedings – 20%
- Litigation – 20%
- Strategic Planning- 10%
3. Decide What Niche to Concentrate On
There are different niches that you can specialize in within the business valuation industry. Some of them include:
- Acquisitions and Mergers
- Buy/Sell Business Agreements
- Marital Dissolution
- Estate Planning
- Tax Planning
- Business Asset Valuation
- Intangible Asset Valuation
- Residual Valuations
- Market Valuations
- Insurance Valuations
- Internet Business Valuations
- Financial Valuations
- Business Risk Valuation
- Earnings Valuation and Forecast
- Business Risk Valuation
- IPO Valuation
- Consultancy Services
The Level of Competition in the Industry
The United States Business Valuation Industry has a mild level of competition. There are a large number of operators competing for the market share in the industry, but the high barriers to entry have it made a bit less competitive.
The business valuation industry is a knowledge-based industry that requires technical know-how and certifications hence very few operators can enter into the business at a time.
One key that helps new entrants compete better in the industry is finding a niche with lower competition. Even though the business valuation industry is a large one, there are a lot of niches in the industry that can help you penetrate the market and gain clientele faster.
For instance, internet business valuations is a relatively new niche- a newcomer can easily specialize in this niche and gain good reputation and customers for themselves faster than competing in highly competitive niches saturated by industry giants such as the estate planning valuation niche, or the acquisitions and mergers niche.
4. Know the Major Competitors in the Industry
The Business Valuation Industry has some top players in the industry. The Top 20 reputable Business Valuation Firms in the US include:
- Mercer Capital
- Baker Tilly
- Andersen Tax
- Grant Thorton
- Valuation Research Corporation (VRC)
- Houlihan Lokey
- Management Planning Incorporation (MPI)
- Duff and Phelps
- Navigant and Huron
- Mckinsey Associate
- Corp Dev
In the last five years, the Business Valuation Industry has not been growing rapidly as it used to in the previous years. Although there is still a healthy demand for business valuation services, business valuation firms are finding it harder to earn superior returns compared to their counterparts in similar industries.
However, it is expected that every industry will eventually witness a period of slowed down growth except some external factors force a steady high growth rate.
The industry witnessed its share of slow growth rate between 2013 and 2018, and the reasons are not far-fetched. Business valuation services thrive better in an ailing economy when debt rates, bankruptcy and liquidation rates are high.
During these periods, a lot of business owners will be looking to sell their business, and many individuals with debts that they can no longer cope with will have no other choice than to file for bankruptcy.
The demand for valuation services is usually higher during these periods because appraisals are carried out to arrive at a fair value and potential sales or purchase price for the business.
However, in the past few years, the economy has been growing, and there have been more people looking to start and grow their businesses than those looking to sell or exit it.
An upward trend in the growth of the Business Valuation industry is however expected in the next five years (2018 through 2013).
The baby boomer generations are already at the retirement age, and many of them will be looking to sell their businesses. There is also a growth in investment rates and partnerships hence the demand for business valuation for investments and partnerships are also expected to increase.
5. Decide Whether to Buy a Franchise or Start from Scratch
The business valuation business is one that thrives on technical know-how and reputation. Most of the people who would hire you as a valuation expert will either do so because of your technical capabilities, your experience or your reputation. These things are hardly transferable, so if you decide to buy an existing valuation business, you may not get the same results that the previous owner had.
However, buying a franchise can give you a better head start compared to starting from the scratch. If you can set up and operate under the name of a reputable business valuation company, you can easily ride on its goodwill and reputation to break into the market and gain clientele faster.
6. Know the Possible Threats and Challenges You Will Face
Some threats are facing the business valuation industry. The introduction of various software and free online business valuation tools can pose a threat to business valuation experts because a lot of non-technical tasks can now be quickly done from behind a computer. The more advanced these tools get, the less attractive professional business valuation services may become to potential clients.
Another challenge facing the industry is finding robust private industry data to compare subject entities against. Many private companies are highly protective of their data, so where comparisons need to be made, valuation experts may have a harder time compiling a robust valuation report to present to their clients.
7. Choose the Most Suitable Legal Entity (LLC, C Corp, S Corp)
Just like most professional service-based industries, a partnership is the best legal entity for setting up a business valuation company in the United States. A partnership is a legal structure where a few professionals who are professionally certified to practice as business valuation experts can come together to form a business valuation company.
The profits and losses of the business are shared amongst the partners according to pre-determined sharing pattern. One of the reasons why service firms are mostly set up as partnerships is because of the significant tax advantages that come with the partnership business structure.
Partners can transfer profits or losses to their individual tax accounts, such that the firm itself can avoid filing tax returns. The partnership also helps your potential clients to build more confidence in your firm because of course, two good professionals are better than one. However, if you are unable to find reputable, certified individuals to join you as a partner, you can consider setting your business valuation company up as a sole proprietorship.
8. Discuss With an Agent to Know the Best Insurance Policies for You
It is essential to protect your business from potential risks and lawsuits from unsatisfied clients. Some of the insurance policies that you will need include:
Professional Liability Insurance
For errors, omissions and misjudgments that may cause your clients to incur losses.
Commercial Property Insurance
For your business premises and assets.
General Liability Insurance
To protect against injuries and damages that may occur within your business premises.
Worker’s Compensation Insurance
To provide compensation for employees that may sustain injuries or other damages while carrying out their professional duties.
Motor Vehicle Insurance
To protect the vehicles used for official errands and transportation.
To save money, you can talk to your insurance company about getting an umbrella policy that will cover for all of these, and have you pay cheaper premiums.
9. Protect your Intellectual Property With Trademark, Copyrights, Patents
You may need to protect some of your business’s intellectual property such as your brand name, logo, and any inventions like the business valuation software that you developed.
It is also important to have your employees sign non-disclosure agreements to prevent them from revealing your client’s information or secrets to competitors.
10. Get the Necessary Legal Documents You Need to Operate
Before you can become a business valuation expert and set up a valuation company in the United States, you will be required to obtain professional certifications from the National Association of Certified Valuators and Analysts (NACVA).
After passing its exams, the body will issue a Certified Valuation Analyst (CVA) certificate that will qualify you to practice and set up a professional business valuation company in the United States of America. You will also need the following legal documents:
- Business License
- Zoning License and Registration
- Employer Identification Number (EIN)
- Insurance Documents
- Business Plan
- State-issued Business License Permit
- Employee Non-Disclosure Agreement
- Intellectual Property Protection Documents
11. Raise the Needed Startup Capital
One of the challenges that most entrepreneurs face when it comes to setting up new businesses is getting the necessary funding to get the business up and running.
A business valuation company is no exception, however; you can explore some of these funding options:
You can consider borrowing some money from your retirement account to set up your new business.
If you find a good partner or partners, you can make equal contributions to start the business.
If you have good credit standing, a good way to raise money for your business is to obtain a bank loan.
Credit Union Loans
You can also join a credit union so that you can access low-interest rate loans that you can use to fund your business valuation business.
12. Choose a Suitable Location for your Business
If you have good networking skills, you can easily start your business from home, and scout for leads and clients online. This can help you save money when you are starting up your business, but as your business grows, you will need an office space where you can entertain business visitors, and have space for your employees.
The best location for a business valuation company is a central business district or a business-dominated area in your city or town. You want to be in proximity to other financial service providers or legal service providers so that you can network with them easily, and get referrals and clients from them.
13. Hire Employees for your Technical and Manpower Needs
You don’t necessarily need too many employees to start your business. You can just hire a receptionist or secretary to receive guests and take calls while you are away but as your business grows, it may become impossible for you to handle all the tasks alone.
You may need to hire other certified business valuation experts and accountants to work on projects with you. As for tools and equipment, you’ll need the following:
- Website and email marketing tools
- Social Media Page
- Industry books, guides, and journals
14. Write a Marketing Plan Packed With ideas & Strategies
The business model of a business valuation company makes it a bit more difficult to market compared to product-based businesses. For better results, you can adopt the following strategies for marketing your business valuation company:
Many business executives who make the bulk of your potential clientele, are closer to their emails than social media or other platforms hence email marketing is one of the most effective ways to promote your business valuation service.
Ask for Referrals
Once you do a good job for a client, you can confidently ask them to refer you to other people. Business executives are very adept networkers so there’s a good chance that you’ll be able to get referrals from them in the future.
Publish a Brochure
A brochure can go a long way, especially when you are providing financial services. A brochure is just like an offline website where you can easily intimate potential customers about the services you offer, as well as the results you have recorded in the past.
Cross-Promote with Other Service Providers
You can also develop relationships with other service providers with better access to your potential clients such as accountants and legal practitioners so that they can recommend your services to their clients, and you can do the same for them.
Owning a business valuation company in the United States can be a very rewarding experience especially when you enter into the industry armed with the right amount of information to help you surmount the inevitable challenges that you may encounter along the way.
The most important key to succeeding in this business is to maintain a good reputation and a positive relationship with your clients because much of your clientele will come from referrals.