Is determining the value of a business a science or an art? Certainly the research…
Robert Pulliam & Yvette Frusciante
Pulliam Financial Group
Like beauty, is value in the eye of the beholder? What are my services worth as a professional, and how do I determine its value? Are standard valuation approaches applicable to pricing professional services? I think so!
The majority of business appraisers are able to recite the three approaches for valuing an ongoing business in their sleep. These approaches, listed in order of theoretical appropriateness, each have their own unique perspectives.
Income approach – measures the future economic benefits available to the owner of a benefit stream;
Market approach – used as a surrogate in valuing larger companies; based on the income approach theory;
Cost approach – rarely used with ongoing operating businesses; embodies the concept of re-creating assets.
Professional practitioners reverse the order of use:
1. Hourly billing – result of efforts extended regardless of value delivered; hourly rate is determined based upon the cost of resources used (employee); closest in concept to the cost approach;
2. Fixed price –used most frequently in pricing commodity services; principal determinant is “what the market will bear”; closest in concept to the market approach;
Contingent pricing – considers benefits attainable and the risk of attaining such benefits; similar in concept to the income approach.
We value businesses using an income approach; we value our body of knowledge using a cost approach.
Given the following scenario, how would you determine your value?
Consultant Val. U. Ator
Professional time required 15 minutes
Billing rate per hour $200
Activity being performed at time idea developed Practitioner taking a shower
Estimated savings resulting from idea $1 million
Known likely market price on fixed price basis $5,000
What should Mr. Ator charge?
A recent study on billing practices indicates an hourly approach methodology is the most common proxy for value (in other words $50 for $1 million benefit). Others would argue that there should be no charge, reasoning it would be unprofessional to charge a client for work performed off premises, and with your clothes off. An untrained realtor, meanwhile, conceiving his idea under the same circumstances would most likely collect $60,000 for selling a million dollar house.
Who is the savvy business consultant? Which service would be viewed as the most valuable to the client?
What are we thinking? And why are we thinking with such blinders? Or are we thinking at all?
We have always done it this way.
2. We believe it is unethical to bill more than we believe we are worth per hour.
We believe we must follow objective standards of billing to insure trust.
4. We simply lack self-esteem and confidence in our own “body of knowledge.”
We alone can determine our own self worth. I cannot necessarily recommend one approach over another or say that one is universally better than another. I do know, however, that our valuation standards require us to consider all three approaches in our valuations. Determining our own value should be no exception.
So yes, one might say value is in the eye of the beholder.