To Value Or Not To Value?

Business valuation is the hottest growing niche market nationally among larger firms, according to a recent Accounting Today survey. Yet many smaller firms also are jumping into this lucrative service area and expanding their client base in the process.

"The 2000 Texas Management of an Accounting Practice Survey" showed that 60 percent of sole practitioners in New Jersey with revenue over $200,000 and 84 percent of multi-owner firms with revenue between $400,001 and $1,000,000 now offer business valuation services. Business valuation involves determining the reasonable value of a business for a given purpose, such as selling a business or obtaining financing. Valuation work often entails working closely with attorneys. An attorney may require a valuation for the administration of an estate that includes an interest in a closely held business, or the divorce of a couple with one or both of the spouses owning a business.

So why is this such a popular niche service among CPAs? Four New Jersey CPAs who perform valuations offered their thoughts on why this is such a good market and the pros and cons of providing the service. "CPAs are probably the best professionals to perform valuations," says Jerry Newler, CPA, a sole practitioner in Mountainside, NJ, who has been performing business valuations since 1978. "We have to adhere to strict ethical standards and we are also able to maintain a level of independence."

The profession's strong knowledge about the workings of business and industry also make CPAs a logical and good choice for performing valuations. "Having a strong business background helps enormously because valuations are all about trying to determine what a business is worth when you understand the business," says Tom Virzi, CPA, ABV, owner of Virzi Consulting in Brielle, NJ, which specializes solely in business valuations.

A particular plus for CPAs who move into this market is the opportunity it provides to balance a practice subject to busy and slow seasons. "Valuations help to mitigate the seasonal problem faced by most CPAs," states Mark DiQuattro, MA, CPA, CVA, a sole practitioner in Belleville, NJ. "I find that the greatest demand for my valuation services is in the summer."

There are a number of professional organizations that offer education and accreditation in business valuations, including the American Institute of CPAs, the American Society of Appraisers (ASA), the National Association of Certified Valuation Analysts (NACVA) and the Institute of Business Appraisers (IBA). The NJSCPA Education Foundation also is a good source for conferences on the subject of business valuations (see following list). As is the case with other specialized services, earning a designation in this area allows CPAs both to enhance their skill sets and increase their marketability.

"I've found that I not only needed additional education and training to get better at business valuations, but I also needed credentials to market my business," says Virzi. "I now hold the ABV designation from the AICPA and I've gone through all the courses required to get my credentials from ASA and IBA," he adds. "It definitely helps market my business when I let an attorney know that I'm working towards these designations."

Richard Lane, CPA/ABV, CVA, Managing Director of Financial Consulting Group, LLC, and its subsidiary Business Valuation Associates, Inc., believes that the best training for CPAs who want to provide business valuation services is the AICPA-sponsored ABV program. "We invest a substantial amount of time and effort in continuing education in the business valuation area," he states. "We supplement the AICPA program with courses offered by ASA."

Yet even with all the various designations and the abundance of education available, a business valuation, by its very nature, is not an exact science, notes Virzi. "Valuation is a very gray area," he says. "Unlike tax work, there really is no black and white formula to follow. There's a lot of personal judgment involved in coming up with a value. That presents a big challenge for some accountants who want to get into this line of work." The lack of a clear formula that can be applied to a multitude of valuation issues is just one of the many challenges a CPA can encounter when performing business valuations. "Finding good research is my biggest challenge in this field," states Virzi. "I work in a lot of different industries and that means a lot of different research. Not only do I have to find the information quickly, but I need to do it in a cost-effective manner."

Another common problem is the lack of proper financial information. "In the best of all worlds, when you do a valuation, you get the information that you need and that information is clean," says Newler. "Unfortunately, 90 percent of the time that doesn't happen. The client and/or business owner may not have complete financial records or even a general ledger."

Some challenges also don't have anything to do with the professional or technical end of the business, but are related to selling the service. "Finding and developing the work is a challenge," says Virzi. "It's kind of difficult to market this business. Basically, you have to keep a good referral base."

Yet while the challenge of marketing the service may seem daunting, there are a number of ways to spread the word. "When I started performing valuations in the early 1990s, I was also doing a lot of peer reviews," says DiQuattro. "Because of the trust I earned from my peer review clients, I found that they were willing to refer their clients' valuation needs to me." He adds that targeted advertising and his advanced degree in economics and experience with forensic economics also has helped with marketing his services to attorneys.

Consistently providing top-rate service also can be an effective way to expand the business. "We grow our business the traditional way by providing highly professional services in a way that we can always be proud of," states Lane. "Each report that we produce for a client is a potential marketing piece."

Another marketing approach is to literally get in front of people. "I do a lot of speaking engagements throughout the year," says Newler. "I've spoken to the New Jersey Society of CPAs, the American Academy of Matrimonial Lawyers, the Judicial College, the New Jersey State Bar Association and various civic groups around the state. And I always walk away with new contacts. Another great opportunity is when I'm testifying in a court case. The judge and attorneys get to see and hear what I do for a living. If I make a good impression, then I expand my referral base."

Ultimately, expanding your client and market base is what developing a niche is all about. A specialized service can open the door to new clientele and an additional revenue stream. "This niche has helped me break into several new markets such as economic damages calculation, matrimonial, shareholder disputes, structured settlements and other types of litigation support," says DiQuattro.

And what sometimes starts out as a "side service" can become a critical part of your practice, notes Newler. "When I started doing valuation work, I looked at it as gravy on top of my regular practice," he says. "But it got to be such an important element that it was no longer gravy "it became the meat. I realized that I had this potential for bringing in a lot of new business because my contacts didn't end with the handling of the case."

Niche services are also usually seen as "value-added" services from the client's perspective. "Clients see this as a more valuable service," states Virzi. "And you can typically charge a higher fee for the service. The hourly rate is significantly better than doing tax work."

Business valuations, as with any new service, present a unique set of opportunities and challenges for CPAs. Is this service appropriate for all CPAs? It lacks the regularity and predictability often associated with tax services. Yet it offers an opportunity to provide a higher paying service that is not subject to seasonal cycles. So - to value or not to value? That is a question only a CPA can answer.

By Ellen Riccardi, NJSCPA Communications Manager