Business valuation engagement letter under VS Section 100

The AICPA valuation standard asks the analyst to set an understanding with the client, preferably in writing, and to document it if it is oral (AICPA Statement on Standards for Valuation Services (VS Section 100)). When the client is also an attest client, the independence rules require the understanding to be in writing (AICPA Statement on Standards for Valuation Services (VS Section 100)).

At a minimum, VS Section 100 lists six items for that understanding (AICPA Statement on Standards for Valuation Services (VS Section 100)). The table maps each one to a clause of the template, so you can check the letter against the standard line by line.

This choice drives the work and the report. Put it near the top. A valuation engagement is one where the analyst is free to apply the approaches and methods that fit, and the result is a conclusion of value, a single amount or a range (AICPA Statement on Standards for Valuation Services (VS Section 100)). A calculation engagement is one where the analyst and the client agree on the approaches, methods and limited procedures in advance, and the result is a calculated value (AICPA Statement on Standards for Valuation Services (VS Section 100)).

The report follows the type. A valuation engagement ends in a detailed or a summary report, and a calculation engagement ends in a calculation report (AICPA Statement on Standards for Valuation Services (VS Section 100)). A client who wants “a quick number” for a buy-sell talk may only need a calculation. A gift tax return or a court case usually needs the full work. Ask what the number is for before you pick.

Be exact about what is valued. “The company” is not a subject interest; “a non-voting quarter of the membership interests in [LLC name], held under the operating agreement” is. Name the class of shares, any transfer restrictions, and whether the interest controls the business.

The standard of value is the definition of value the analysis must meet, such as fair market value for tax work or fair value under a state statute in a shareholder dispute. Quote the definition and its source in the letter. Add the premise, going concern or liquidation, because it changes the approaches that make sense.

Fix the valuation date to the event: the date of death for an estate, the date of the gift, or the date a shareholder left. If the analyst relies on another specialist, for example a real estate appraiser for the building the business owns, say who hires that specialist and how far the analyst takes responsibility for that work (AICPA Statement on Standards for Valuation Services (VS Section 100)).

Tax uses add rules the letter should plan for. For a gift, a sound appraisal can stand in for part of the detail the return must disclose. The appraiser must not be the donor, the donee, a family member of either, or their employee (26 CFR 301.6501(c)-1, adequate disclosure of gifts). The appraisal must state the transfer date, the appraisal date and its purpose, and describe the method and assumptions (26 CFR 301.6501(c)-1, adequate disclosure of gifts).

For a noncash charitable gift claimed at more than $5,000, such as an interest in a closely held business, the donor generally needs a qualified appraisal and must complete Form 8283, Section B (26 CFR 1.170A-16, Substantiation of noncash charitable contributions). The appraisal’s fee cannot be based to any extent on the appraised value (26 CFR 1.170A-17, Qualified appraisal and qualified appraiser). Put both rules in an optional rider, so the letter works for a buy-sell as well as for a return.

Valuations slip when the data does. List the documents with a due date. Say the report date moves when they arrive late. At the end, ask for a signed letter that says the data was complete.

• Financial statements and federal tax returns for the last five years.
• Interim statements for the current year and the same period last year.
• Budgets or projections, with the assumptions behind them.
• Operating, shareholder and buy-sell agreements, with all amendments.
• A capitalization table and any recent sales of interests.
• Key customer and supplier contracts, and real estate and equipment leases.
• Prior valuations of the business or of any interest in it.

• AICPA Statement on Standards for Valuation Services (VS Section 100): The analyst establishes an understanding with the client, preferably in writing, covering six minimum items; it defines valuation and calculation engagements, their report types and the use of specialists.
• 26 CFR 301.6501(c)-1, adequate disclosure of gifts: An appraisal may satisfy part of adequate disclosure if the appraiser is independent of donor and donee and the appraisal states the dates, purpose, method and assumptions.
• 26 CFR 1.170A-17, Qualified appraisal and qualified appraiser: Defines a qualified appraisal and provides that its fee cannot be based to any extent on the appraised value.
• 26 CFR 1.170A-16, Substantiation of noncash charitable contributions: No deduction is allowed for a noncash contribution of more than $5,000 unless the donor obtains a qualified appraisal and completes Form 8283, Section B, subject to the listed exceptions.