Partners and founders of independent business valuation firms have several potential exit options when they decide to transition out of their businesses. These options depend on factors such as the firm’s size, reputation, client base, internal talent, and whether the goal is to preserve the business or maximize financial return. Here are some common exit options:
1. Internal Succession
Selling to Internal Partners or Employees: Many independent valuation firms look to transition ownership to existing partners, senior employees, or associates through a structured buyout or Employee Stock Ownership Plan (ESOP). This ensures continuity of the business and client relationships.
- Advantages: Ensures the firm’s culture and client relationships are maintained. Internal buyers are often more committed to the firm’s long-term success.
- Challenges: Internal buyers may not have the financial resources to pay full value upfront, necessitating a gradual buyout or earn-out structure.
Leadership Transition: Grooming one or more senior partners to take over the business and gradually transition ownership over time is a common option for firms that want to preserve their legacy and minimize disruption to clients.
2. Sale to Another Valuation Firm
Strategic Acquisition by Another Firm: One of the most common exit options is selling the business to a larger or similarly sized valuation firm looking to expand its market share, geographic reach, or service offerings.
- Advantages: This type of sale may allow the selling partners to negotiate a higher valuation, especially if the buyer views the acquisition as a way to expand into a new market, gain talent, or acquire clients
- Challenges: The process of merging or being acquired by another firm could lead to cultural changes, and the selling partners may be required to remain involved for a transition period.
Roll-up Strategy: In certain industries, there is a trend of “roll-ups“, where smaller valuation firms are consolidated by a private equity firm or strategic buyer. Roll-ups often allow founders to sell for a competitive price while helping the buyer achieve economies of scale.
- Advantages: The roll-up strategy often leads to a higher multiple on earnings as part of a larger consolidation strategy.
- Challenges: Founders may have less control over the business post-sale, and integration risks can disrupt client relationships.
3. Sale to an Accounting or Financial Services Firm
Acquisition by Accounting Firms or Larger Advisory Firms: Many mid-tier accounting firms, as well as the Big 4, are constantly looking to enhance their valuation capabilities. Selling to a larger accounting firm that lacks internal valuation expertise is a viable exit strategy for independent firms.
- Advantages: This can provide an attractive valuation for the firm, especially if the acquirer sees strong synergy between the valuation practice and its existing audit, tax, or consulting services. Additionally, accounting firms often have the resources to ensure a smoother transition.
- Challenges: Cultural differences between a smaller boutique valuation firm and a larger accounting firm may cause friction. The process can also involve a detailed due diligence process, and founders may be required to stay involved during the integration phase.
4. Private Equity Acquisition
Private Equity Buyout: For larger valuation firms with consistent revenue and cash flow, private equity firms can be a viable option. PE firms may acquire a controlling interest or the entire firm, with the goal of growing the business and eventually selling it at a higher valuation. Duff & Phelps was sold to a private equity firm.
- Advantages: Private equity buyers often offer competitive valuations and can bring significant resources and expertise to grow the firm.
- Challenges: PE firms usually aim for growth and eventual exit (through another sale or IPO), which can lead to changes in the business model and operations. Partners may be required to stay on for several years to ensure growth targets are met before they can fully exit.
5. Merger with a Complementary Firm
Merging with a Complementary Firm: Founders may seek to merge their valuation firm with a complementary business such as an investment banking, wealth management, or litigation support firm. This type of merger allows both businesses to expand their service offerings and client base.
- Advantages: A merger can lead to synergies, including cross-selling opportunities between the two firms. It also provides an opportunity for the valuation firm’s founders to gradually reduce their involvement while ensuring the continued growth of the business.
- Challenges: Finding the right partner firm that shares similar values and goals can be difficult. The merging process may involve complex negotiations and require the alignment of cultures and management styles.
6. Selling to a Family Office
Family Office or High-Net-Worth Buyer: Some high-net-worth individuals or family offices with experience in professional services are interested in acquiring valuation firms as part of their investment portfolio. This could be an option for founders looking for an exit while ensuring the continuity of the firm.
- Advantages: Family offices may have a long-term investment horizon, ensuring the business isn’t disrupted by short-term growth pressures. This may also offer a smoother transition for employees and clients.
- Challenges: This option might limit the selling price, as family offices may be more conservative in their valuation compared to strategic buyers or private equity firms.
7. Earn-out Structure
Earn-out Agreements: In some exit scenarios, founders may sell their firm but agree to an earn-out, where part of the sale price is contingent on the firm’s performance over several years post-sale. This incentivizes the selling partners to stay involved and ensure a smooth transition.
- Advantages: An earn-out can maximize the sale price if the firm continues to perform well under new ownership.
- Challenges: If the earn-out terms are based on aggressive performance targets, founders may face significant pressure to meet financial goals even after they’ve intended to step back.
8. Wind Down and Close
Gradual Wind Down: If the valuation firm is small or highly dependent on the founder(s), one option is to gradually wind down the business, servicing key clients over time until operations cease.
- Advantages: This allows the founder to retire on their own terms, without the complexities of selling or merging.
- Challenges: This option doesn’t provide the financial upside of a sale, and valuable assets like client relationships, intellectual property, or goodwill are left unmonetized.
9. IPO (Less Common)
Going Public: While rare in the business valuation space, a firm that has achieved significant scale and visibility might consider going public through an IPO. This option is usually more applicable for large firms with diversified service lines or significant growth potential.
- Advantages: This can be a lucrative exit strategy if the firm has strong financials and growth potential.
- Challenges: The IPO process is highly complex, expensive, and usually only viable for larger firms with a well-established market position.
Some Major Acquisitions of Valuation Firms in the Recent Years
There have been several notable transactions and events where independent business valuation firms were merged, bought, or sold. Here are a few examples:
- Valuation Research Corporation (VRC): In 2023, Valuation Research Corporation (VRC) was awarded “Valuation Firm of the Year” by the M&A Advisor. VRC has been involved in various merger and acquisition activities, demonstrating its influence and leadership in the global valuation space. This recognition highlights its continuous involvement in high-profile valuation-related M&A work (Valuation Research Corp.)
- Appraisal and AMC Mergers: The past few years have seen a rise in acquisitions of smaller appraisal and business valuation firms by larger companies. For example, firms like SitusAMC and Nationwide Property & Appraisal Services have been actively acquiring appraisal management companies (AMCs), including smaller independent firms. While these transactions mostly involve real estate appraisals, they indicate broader consolidation trends in the valuation industry (Valuation Legal).
- FP Transitions’ Role in Succession and Valuation: FP Transitions, a firm specializing in valuing advisory and valuation firms, helps owners transition by selling to employees or internal partners through structured buyouts. Their database of over 1,500 completed firm transactions provides insight into trends, including how smaller firms are being bought by internal teams, offering a smoother exit for founders (Nerd’s Eye View | Kitces.com).
These examples demonstrate that both mergers with larger firms and internal buyouts are common exit strategies for founders in the business valuation sector. The consolidation of smaller firms by larger players and internal employee buyouts are two key trends shaping the market today.
Conclusion:
The exit options for partners and founders of independent business valuation firms are varied and depend on their goals, the firm’s size, market position, and internal structure. Internal succession and selling to another valuation or accounting firm are among the most common routes. However, with increasing interest from private equity and complementary service firms, founders have more choices to achieve both personal and financial objectives in their exit strategy.
