When Your Client Needs a Business Valuation

When Your Client Needs a Business Valuation (CPA)

When one of your clients is faced with a situation where they need to estimate how much their business is worth, many will automatically ask you as their CPA to provide the estimate. If you or your firm does not have valuation expertise, what do you do? Here are a few options to consider.

Do an informal analysis and give your client an estimate

Strengths - This is the easiest and quickest way to get an estimate. You have satisfied your client’s request and earned some additional revenue.

Weaknesses - Depending on the level of service you provided, you may have violated professional standards (AICPA Statement on Standards for Valuation Services #1). Since you have little or no valuation experience, your estimate may be way off the mark. Even if your estimate turns out to be reasonable, you have violated your client’s trust by providing a service you were not qualified to do. If you have a longstanding relationship with this client you may not be considered independent.

From my own experience this was the favorite option for many CPA’s. They got away with doing substandard work that they were not qualified to do because there was little oversight and no one knew any better. Increased scrutiny, new professional standards, and higher qualification requirements from the Internal Revenue Service and the Small Business Administration will make it more difficult and costly for this substandard work to continue, but it’s still out there.

Inform your client that you cannot provide the estimate, and 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 and could use some help. You are missing a chance to provide better service and generate additional fees. In addition to not being able to provide the estimate, you will appear unhelpful or uncaring.
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. The client will 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 professionals 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 professionals.

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.

Hire a valuation subcontractor to do the estimate

Strengths - If you have worked with this professional before, you know what to expect. Your control over the work process and product will be defined in your contract, so draft it carefully. Your exposure to liability may be shared with the subcontractor. A high quality valuation will solidify your client relationship.

Weaknesses - Your reputation will depend 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 or get poor quality work.
Conclusion

A key factor in making the right choice is knowing how to evaluate the competence and work of valuation professionals. So do your homework. The option 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.

© David E. Coffman, 2009