Start a BV Engagement the Right Way: Communicate with Clients to Identify the Correct Goals and Benchmarks (2003)

EXECUTIVE SUMMARY * EACH VALUATION ASSIGNMENT IS UNIQUE, and often there's more than one way to answer a question, interpret a fact or approach a problem. How the valuator prepares the client for the BV engagement sets its direction and becomes the foundation of the engagement letter and, ultimately, a responsible and accurate final product. * THE ENGAGEMENT LETTER ENSURES both client and practitioner understand the assignment and can help a CPA/ valuator clarify the ownership interest to value, the appropriate professional standards to follow and the fees and payment terms. * THE VALUE OF COMPANY for gift-tax purposes likely will differ from its value for a sale to a specific purchaser, and an entity's value for sale on a going-concern basis will differ from its liquidation value--which similarly differs if the valuation is for an orderly liquidation as opposed to a forced one. * THE VALUATOR'S DECISIONS about BV methodology, discounts and premiums and other formulas depend on knowing whether what's being valued is an entire entity vs. a 49% interest in a limited liability company, for example. * FINDINGS ARE REPORTED IN DIFFERENT WAYS: formal (traditional) written reports, informal (summary) reports, no written report at all or a hybrid of the three. The amount of time to produce each of these varies substantially, so know what the client wants and budget time accordingly. * BV FINDINGS ARE NOT TRANSFERABLE to serve multiple purposes. An engagement letter should specify that a valuation opinion is valid as of a particular date for a particular purpose--and no other. Time is money and the marketplace can be unforgiving of mistakes in today's professional services environment, so listen well when someone asks you to perform a business valuation (BV). Clients' reasons for needing valuations vary greatly and may include an emotional component (as in death, divorce, litigation or retirement, for example) that makes them especially anxious about the process. In contrast to compliance-based CPA services, which lend themselves to schedules, checklists and clear-cut decisions, many aspects of BV rely on interpretative rather than definitive answers. Valuators must take care to begin each assignment with a crystal-clear understanding of its context and purpose. This article offers instruction on how to frame a business valuation to minimize the possibility of missteps. GET ON THE GOOD FOOT CPAs have been developing BV as a practice area for about a decade, and certification, competence and due care are important aspects of their technical proficiency. The fifth article of the Principles of Professional Conduct in AICPA Professional Standards (ET section 56), says, A member should observe the profession's technical and ethical standards, strive continually to improve competence and the quality of services, and discharge professional responsibility to the best of the member's ability. In the case of business valuation services, the Statement on Standards for Consulting Services and ET section 102, Integrity and Objectivity, not only requires member integrity and objectivity but warns against conflicts of interest and subordination of judgment to others. Not meeting those standards can be construed as negligence. However, CPA valuators who obtain solid credentials in this practice area (an ABV, for example) know that methodologies, procedures and even valuation standards are not absolute. Each situation has unique aspects, and often there's more than one way to answer a question, interpret a fact or approach a problem--it is up to an informed valuation professional to make the call. How the valuator prepares for the engagement sets its direction and becomes the foundation of a responsible and accurate final product. The sequence involves gathering information for the project, preparing the engagement letter, performing the valuation and reporting the results. …