So Your Client Needs a Business Valuation

By David E. Coffman CPA/ABV, CVA

One of your clients is faced with a situation where they need to estimate how much their business is worth. It could be for a property settlement, financial planning or whatever. How should you handle it? Here are some options.

Ask your client to provide an estimate

Strengths – This is the easiest, quickest, and cheapest way to get an estimate. Make sure to get a signed statement from your client for the file. You should only consider this option if a “ballpark” estimate is needed for internal purposes.

Weaknesses – Your client is not objective, and has no training or experience in valuing businesses. Therefore, the estimate is of little value and should not be used if it has any chance of being used by an outsider. The value of your client’s business is likely to be an important factor in whatever issue is being addressed, so why rely on a suspect estimate. If there are problems, the signed statement of value from your client won’t provide you with much protection.

Instruct your client to get an estimate from their CPA or financial advisor

Strengths – This option gives you more protection from liability since another professional is involved. Also, the CPA/advisor is familiar with the client’s business.

Weaknesses – You have no control over the competence of your client’s CPA or financial advisor in performing valuations. It can be dangerous to assume that all CPAs are proficient in this specialty. Therefore, the quality of estimate may vary greatly. A long-standing relationship with the CPA/advisor may threaten the perception of independence, especially if this issue is litigated.

Inform your client that they need a valuation, but don’t help them get one

Strengths – This alternative distances you from the whole valuation process.

Weaknesses – Your client probably has no clue about selecting a valuation professional. Your client could use some help and you are not providing it. You are missing a chance to provide better service and generate additional fees. Also, you will have no control over the quality of the estimate you receive.

Help your client select a valuation professional, but don’t specifically recommend anyone

Strengths – You take advantage of a chance to provide better service and generate additional revenue. You help your client make an informed choice. Since your client decides whom to hire, they keep a sense of control and you limit your exposure. You also get a higher quality estimate.

Weaknesses - You actually have to know something about valuations and the professionals who do them. It takes more of your time.

Give your client a list of suggested professionals to choose from

Strengths – You have some control over the competence of the professional and quality of the estimate. Your client makes the final selection, minimizing your exposure.

Weaknesses – Your reputation is indirectly at risk, so you should take the time to select only the best. 

Recommend a specific professional

Strengths – You know the competence level of the professional and the quality of the work.

Weaknesses – Your reputation is directly at risk without any control over the work product.

Your firm hires the valuation professional 

Strengths – Same as above, plus the valuation work-papers may be protected by attorney-client privilege. Make sure that the engagement letter is between the attorney (not your client) and the valuation professional, and that all fees are paid directly by the attorney.

Weaknesses – Your liability exposure depends on another professional’s work, so be extremely careful. You are directly responsible for paying the valuation professional’s fee. Your client is left out of the process and may blame you if they disagree with the estimate.  

Conclusion

A key factor in making the right choices is knowing how to evaluate the competence and work of valuation professionals. So do your homework. The options you choose will depend on the facts and circumstances of each case. Giving some thought, in advance, to which options you prefer for typical scenarios means you will be prepared to implement them consistently and efficiently.

© 2004 David E. Coffman