A business appraisal is a serious project. Making sure clients understand what to expect is something you would want to handle with care. Spelling out what happens each step of the way can save you some grief down the road.

Consider just some possible situations that could lead to client disappointment. Let’s say you prepare a business valuation report for the client’s eyes only. Unbeknownst to you, the client shares the appraisal report with a lender who demands additional disclosure before making a loan. The client is frustrated facing more costs and delay. The moral? Agreeing on who your business appraisal is intended for is very important.

In fact, business appraisal standards such as Uniform Standards of Professional Appraisal Practice (USPAP) require that you state in your report what format your valuation follows. If your client is the only party intended to read the report, you can opt for the Restricted Appraisal format. On the other hand, if others are expected to see the valuation results, USPAP standard requires you to choose the broader Appraisal format.

The level of information disclosure you provide could make a lot of difference. An outside investor or business buyer may not have the information that the business owners take for granted. Hence, if the business is put up for sale, you should consider additional disclosure to make your report useful in a business sale or equity investment situation.

Want to avoid phone calls from an irate client over the bill? It would be wise to state what your fees are going to look like up front.

You may also spell out the rules of engagement, especially how possible misunderstandings are to be resolved. Limiting your exposure in case of a dispute could save you a lot of trouble as well.

These are just some of the reasons you should consider preparing a letter of engagement before starting on a business valuation project. Let the client see what the project is going to take in terms of cost, time, and effort both on your client’s part and your own.

Here are some key elements to include in your letter of engagement:

  • Purpose of the proposed business appraisal
  • Scope of the valuation project
  • How the results will be reported
  • Who will do the work
  • Project fees and how the client is to be billed
  • What the client’s responsibilities are
  • Limitation of your liability and how disputes are to be resolved
  • How the valuation project can be terminated by the parties
  • Any assumptions made at the outset

Prepare an engagement letter and share it with the client. Getting a client buy-in early on can help you grow a steady following of happy customers and well managed valuation projects.

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