In last week’s post, 8 unconventional rules for running a successful BVFLS practice, I closed out our conversation with this:
Our marketplace is more competitive, our clients are more empowered, and our value is less obvious. The commoditization of our work has left us competing with do-it-yourself websites that offer inexpensive valuation solutions, making prospects, clients, and referral sources think this is all we have to offer.
Unbeknownst to me, just five days before, this article/advertorial appeared on Entrepreneur.com:
Emphasis on the big data implications of this article.
The author is Michael Carter, and the bio line says he is “the founder and CEO of BizEquity and the inventor of the market-leading online valuation service that is helping the small business economy and the financial institutions that serve them.”
And if you’re new here, welcome aboard. This is what we do!
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Below, verbatim, is the article. But first, I have listed my thoughts by paragraph to discuss what we BV experts are up against. Spoiler alert – #8 sucks for us.
Also, be sure to read the So what and In real life sections at the end.
My dissection of the article
(1) Are these 200 million small businesses our target market of prospects and clients? If yes, does our process (and professional standards) make valuing these companies “both impractical and out of reach”? Before you answer, remember, it is what business owners believe that matters.
(2) Four weeks I can see; six weeks seems incongruent in today’s world that has been conditioned to expect fast service. The cost is a price and may or may not represent the value of the services we provide (see So what).
(3) BizEquity bifurcates its pricing by companies having more or less than $5 million in revenue (see below). So the plight here might be exaggerated. Yet, it’s the perception being spread by a powerful market leader versus our fragmented credentialing organizations that run no advertising … because our dues support resources to help us do the work, not get the work.
(4) How many of us are doing valuation work to help small companies attract financing or obtain insurance? How big are these needs? And if those shortcomings really are costing a business “thousands of dollars each year that they simply cannot afford to lose,” doesn’t that provide the necessary ROI justification for our valuation work?
(5) This sounds like a consulting service we could all be offering – in our respective industry niche, of course.
(6) Yes, knowledge is power. But at the end of the day, we all know value is analyzed and price is negotiated. So what business owners end up with is likely to be more a function of their negotiating skills than their valuation knowledge.
(7) Say what you will, BizEquity has a McDonald’s-like counter on its website indicating it has, so far, valued 33,193,624 companies globally. That’s one heck of a scalable service resulting from “the democratization of big data.”
(8) And now the burr under our saddles. From their website, here is BizEquity’s delivery and pricing:
This is pricing with certainty, which is much more in line with how we “order” products and services today. (Yes, I know many of us offer fixed fees … but none that compete with those in BizEquity’s matrix).
The problem is that BizEquity’s timing and pricing will become anchor points for our timing and pricing. How? First, word spreads that generally accepted valuations are being performed within these parameters. Second, as these small businesses grow and enter our target market of prospects and clients, they may wonder why the lead times and pricing for our services are more than double what they were getting … so why should they switch to us?
(9) So that’s it … we are to be replaced by “fintech innovators.” I don’t believe that, and neither do you. But remember, this is an advertorial.
The original article
“What’s your business worth?” is a difficult question to answer, especially for small businesses. In fact, according to a 2014 IBISWorld report on “Business Valuation Firms in the U.S.,” 98% of business owners don’t know the value of their company; those that do tend to be large companies that have the finances and resources available to them to find out. For the remaining 200 million small businesses, valuing their business seems to be both impractical and out of reach. (1)
Business valuation is difficult for two main reasons: time and cost. In conducting research for our book What’s Your Business Worth?: The Entrepreneur and Advisor’s Guide to Discovering, Monitoring, and Optimizing Business Valuation, Daniel Priestly, Scott Gabehart and I found that offline valuations can take between four to six weeks to complete and can cost upwards of $8,000. (2) This amount of money and the resources that must be funnelled [sic] into the process are often too costly for a small business to take on, and as such, valuation doesn’t become high on the list of priorities. (3)
Being unaware of valuation information means that business owners do not have sufficient insight into key areas of optimal knowledge, such as the right capital structure for the business, and the proper insurance coverage needed to protect it. This in turn can cost them thousands of dollars each year that they simply cannot afford to lose. (4) In fact, the 2013 Global Entrepreneurship Monitor Report, produced by Babson College and other universities, found that the top reasons for discontinuing a business in the U.S. were problems obtaining financing — an issue that can be directly related to poor valuation knowledge.
Keeping up-to-date on their business valuation helps owners to make important decisions for their company, including when to raise capital and how to ask for capital or a loan from investors or banks, understanding when to exit and their exit strategy and when to purchase another business in efforts to strengthen their own offering. (5) An inaccurate business valuation can cost a business millions, either by the owner selling it for too little or by paying too much for a company they’re acquiring.
When it comes to knowing how a business valuation strengthens a business, knowledge is always power. It gives business owners the ability to remain ahead of their competitors and potential purchasers, keeping owners well prepared for any situation or offer that comes their way. (6)
One has to think that this must all seem rather daunting for small businesses; for the most part they understand the importance of valuing their company, but lack the necessary resources to do so. Luckily, we have seen an increase in the democratization of big data – small, purposed data insights on a particular sequence of questions or on a particular insight – throughout the financial services sector to give business owners more access to the information they need to help them reach their highest potential. (7)
Big data makes business insights more readily available, less intrusive, easier to access and most importantly, can be achieved in less than 10 minutes and at a tenth of the cost. (8) The availability of big data allows business owners to obtain accurate and reliable online valuations and gives them the freedom to make decisions that they otherwise would have gone into blindly. When they understand their business value, owners are able to improve their performance on all fronts and become more competitive in their respective market.
The introduction of big data works to the benefit of small businesses but can work against the financial services industry. Unless they begin to provide more services and products to help business owners gain the insight, knowledge and transparency they need to run their business at its full capacity, fintech innovators will overtake this industry. (9) However, if they can embrace new technologies that support the growth and democratizing of knowledge and efficiencies for small busineses [sic], we expect we will see improved benefits for small businesses and growth in the overall financial services industry.
I can’t stress this enough. It’s up to each of us to (1) educate our clients about the services we provide and (2) match our prices with the value of those services … knowing full well that it is the client, not us, who determines that value based on the pain threshold of the problem we are solving for them.
Regarding the latter point, if an attorney says to a client:
You need a valuation for gifting. Based on the size of the company, the amount of the gift, and the IRS budget, it’s unlikely the valuation will be audited so get one done for the cheapest cost.
Or if an attorney says to a client:
This thing is going to court. There will be a bulldog of an attorney and an opposing expert on the other side. It is critical that you get a defensible valuation because of what’s at stake.
In either case, an hourly rate times a number of hours is not going to equal the value of the service we provide to the client. Yes, this is an argument for value pricing – one that cuts both ways.
In real life
BizEquity is one of several companies that offer online valuation services. If you read their websites, their clients are a who’s who of our typical (sought after) referral sources. So they are making inroads. Fast.
Also, it would be easy to dismiss this article by saying these kinds of businesses are not our prospects or clients. But how long will it take for big data valuations to creep up into the tier of companies that we do work with?
Last, I’ve read in many LinkedIn group discussions that say AI, machine learning, and other technology (like big data) will never replace our common sense, informed judgment, and reasonableness. Yet, BizEquity has already valued 33,193,624 companies … that’s a lot of outsourced common sense, informed judgment, and reasonableness.
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