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Smart growth: expanding your business involves so much more than adding clients and increasing fees.


After struggling through the 2008 recession, PahRoo Appraisal & Consultancy in Chicago has been growing at an annual rate of 8 to 12 percent. "Our growth has come both from existing clients and new clients," says Michael Hobbs, SRA, the firm's president. But it has also been the result of "intentionally managing the business for growth," he explains.

In reality, there is more to growth than just getting more clients and more fees. Growth can create new demands on a firm, and if it is not well-managed, companies can run into problems ranging from a shortage of people to declining quality and overextended finances. "I have seen many companies over the years grow themselves out of business," says Ruth King, an Atlanta-based small business expert and author of The Courage to Be Profitable.


"There definitely are risks to growth," says Hobbs. Healthy growth doesn't just happen: Appraisal firms need to actively manage themselves to avoid a number of pitfalls. For Hobbs, "it has been worthwhile to take the time to really get some education around managing growth." And small business experts--along with appraisers who have experience growing their firms--can be a valuable source of that knowledge.

Building the foundation

Growth typically means increased complexity, with more clients and more employees. As a result, owners need to think early on about how the larger firm will work. With more people involved, it is no longer enough to just carry those concepts in the owner's head. "Small businesses often don't put formal processes in place, so they have to keep re-creating the wheel every day or with every new person they hire," says Barry Moltz, a Chicago-based entrepreneur and small business consultant. As a result, employees are unsure of what to do, work tends to be inconsistent, and quality can suffer.


"We sometimes see smaller firms grow quickly without developing the needed controls," says Peter Christensen, general counsel at Santa Barbara, California-based LIA Administrators & Insurance Services. "This might be something as simple as requiring that every appraisal has to be reviewed for quality by another appraiser before it goes out the door, but it's important to put those things in writing." Documenting processes may seem like common sense, but even some large appraisal firms and appraisal management companies fail to do so, he says.

In preparing for growth, it also can be useful to rethink the way work is done. Braun & Associates, in Knoxville, Tennessee, has done just that, creating teams, or "pods," with each pod consisting of two or three appraisers supported by one researcher. This division of labor lets appraisers devote more time to revenue-producing activities in the field, enabling the firm to maintain quality and do more without adding staff. That approach has worked well, says Creighton Cross, MAI, president of the firm, who currently is talking to valuation firms in other markets about creating a centralized, shared back office that can support multiple firms. The idea, he explains, would be "to put all of the orders through one database in a centralized location and do all the front-end research and the review process for all of the commercial appraisals at that location."

Technology also can play a key role in managing growth, helping firms track the expanding business, communicate with employees and clients more effectively, and increase productivity. Mobile technology, for example, makes Braun & Associates' pod model more effective. "I can go to a property inspection in Chattanooga and have my photos and sketch uploaded and sent back to my office in Knoxville," says Cross. "By the time I get back there an hour and a half later, the entire front of the report is done."

Technology is part of the growth equation for Hobbs, too. His firm has adopted a shared calendar that tracks everyone's appointments and report reviews. "That way we have a sense of the workflow and people's workloads," he says. Employees also use Skype instant messaging for more urgent internal communications. "We have found that it shortens the feedback loop and improves our customer service," he adds.

Growing appraisal firms also need to watch for legal and financial risk as their situations change. For example, if a small firm is taking on more people, it may be time to look at the company structure. "Even if you are going from a mom-and-pop firm to a five- or 10-person firm, you almost certainly want to have a limited liability form of business--a corporation or an LLC," says Christensen. Otherwise, the owners could have full personal liability for each other's mistakes, and for those of their employees. "Adopting the right kind of entity is a key upfront consideration," he says.

Likewise, growth should prompt a look at the firm's liability insurance. "Appraisers often have insurance policies that only cover them for their own individual work," says Christensen. "The mistake that some make is that they think that kind of policy is OK as their firm grows. It's not." Such policies cover just the work of that individual, not the work of anyone else at the firm--leaving the firm and its owner unprotected if an employee makes a mistake. Even if employees and contractors have their own individual policies, the firm itself will still not be covered safely.

"The employee or contractor's policy may not cover the firm or may no longer exist at all. I have seen owners get trapped by this mistake when a lawsuit is filed against the firm," Christensen says. "So the firm really needs its own liability insurance, and it should include coverage for past and present employees and contractors."

Minding the money

In business, there is growth, and then there's profitable growth. The difference usually depends on paying attention to the financial details, beyond the revenue coming in the door. "Too many people focus on the top line instead of the bottom line--on sales, rather than how much money they actually get to keep," says consultant Moltz.

Cash flow is one of the most important--and one of the most neglected--financial metrics. "That's often a blind spot," says Moltz. "People may have no idea whether they have more or less cash at the end of the month, and they don't know what's affecting their cash flow. Is it because their customers are paying later? Or are they paying their bills too soon?" Knowing those things is critical to keeping expenses and revenues in balance.

PahRoo Appraisal's Hobbs says that is a lesson he has learned along the way. "Before, finances were almost an afterthought," he says. "We were not as diligent around the accounts receivable and accounts payable." He ended up engaging a part-time financial person to create cash-flow statements and financial forecasts. His firm also monitors several key performance indicators, such as number of assignments per day, average fees, days outstanding for receivables, and the cycle time for getting paid. "That has helped us understand our cash position, and it gives us a better feel for the cadence of our business," he adds. Those insights also help with growth-related decisions: "We have a better sense of whether it's prudent to make investments or develop more talent."




Hobbs drew on that insight to conduct an analysis of the business and found that 80 percent of its revenues were coming from about 20 percent of its clients. The firm then narrowed its marketing efforts to target a handful of situations that such clients typically needed help with, and essentially turned away from some clients to focus on those with the most potential. "When we narrowed our focus, the number of referrals we received went up," says Hobbs. "When you are a smaller firm, it feels a bit scary to say no to business. Yet we consistently find that the more specific we are, the more we can grow, because we aren't spending time on opportunities that are not a good fit."

The human element

In a service industry, people are a direct driver of success, and growth typically depends on bringing in more talent. Here, a key question for valuation firms is whether new hires will be actual employees or independent contractors. Christensen says that in many cases classifying appraisers as contractors is incorrect, and both the federal government and plaintiffs lawyers are scrutinizing such arrangements more closely. Firm owners also need to be aware of the changing view of the exempt status--that is, employees who do not need to be paid overtime. "The courts have recently found in big class-action cases that appraisers working for a firm were not properly classified as exempt employees and are entitled to back overtime pay," he says. The ins and outs of these worker classifications can be complicated, he adds, "so this is something where the growing firm will need to get specific legal advice."

In hiring, firms need to make sure they are following standard HR procedures to minimize legal problems. In addition, Christensen says, they need to adequately vet new hires. "Make sure the person has not had significant disciplinary matters with state regulators or significant professional liability claims against them," he says. "That doesn't mean no complaints, just nothing unacceptable." Otherwise, he says, "when the firm goes to get insurance, it's going to be a lot harder if they just hired an appraiser who has a really bad track record."

A shortage of experienced appraisers often is a barrier to growth. One solution is to cast a wider net during the hiring process. "I have hired a number of recent graduates from university real estate programs. There is a large labor pool of young talented minds that are eager to learn," says Larry Sage, MAI, president of The Sage Group in Fleming Island, Florida. While an experienced appraiser can be a valuable asset, Sage believes "that most valuation firms underestimate the energy, enthusiasm and knowledge that young folks bring to the table."

Hobbs took a similar approach to hiring, bringing in less experienced people and training them in the basics so that they could quickly become productive. "They do things like follow up on public records or reach out to building departments--important stuff, but it's not in the area of determining value," says Hobbs. "Hiring and training these people gives us a pipeline of talent that were developing, while keeping our most experienced people focused on the most valuable things."

Finally, there is a personal side to the talent equation, and owners should ask themselves a key question: How much do we want to grow? One of the advantages of the valuation profession is the flexibility to balance work and life. "The challenge is to find the sweet spot in terms of number of appraisers, workload and product quality," says Sage. "When I started out, I worked seven days a week. I have since learned that at that pace, life will pass you by." Sage made an effort to make family a priority and says that his firm has grown to be big enough. "We could hire more appraisers, work more hours and increase billings, but at what cost? It's a personal question, but I think that bigger is not always better."


Avoid growing pains

Cash flow can be a problem for a growing company, but small business expert Ruth King suggests a formula to help firms determine from a financial perspective if they are growing at a manageable rate. "You look at annualized sales--what you think you're going to do for the entire year--and divide it by working capital," she says. "Working capital is your current assets--things that are cash or can be turned into cash within a year--minus your current liabilities. It's a simple formula, and you want the number to be 10 or less. If you go over 10, then you're in a situation where you may have trouble finding the cash to keep growing."

King also offers another rule of thumb for growing firms: "I tell everybody, save 1 percent of every dollar that comes in the door. That's because you never know when Murphy's Law is going to hit you with things like a check you were expecting didn't come in but you still have to make payroll. This way, you have a little bit of a cash cushion to take care of those things." King suggests having cash reserves to cover at least three months of operating expenses.

Peter Haapaniemi is a Detroit-based freelance writer.
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Title Annotation:Best Practices
Author:Haapaniemi, Peter
Publication:Valuation Magazine
Date:Mar 22, 2016
Previous Article:Value proposition.
Next Article:Thinking big: an appraiser talks about the larger challenges of working in a smaller city.

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