The Contingent Fee
A business owner hires you to value her company for a planned sale. During scoping she says: 'I'll pay your normal fee, plus a bonus if your number comes in above $30 million - that way we're aligned.' Separately, she mentions that her brother-in-law, a CPA, 'will just glance at the draft and sign off' so the report can carry his firm's letterhead. She also asks you to keep the engagement confidential from her minority partner, who owns 20% and has a right of first refusal on any sale. Your preliminary work suggests a value closer to $24 million.
1. Analyze the contingent fee proposal against professional ethics standards.
Read the worked answer
A success fee tied to the value conclusion creates a self-interest threat to objectivity and independence that cannot be adequately safeguarded when the fee depends on the outcome of the valuation itself. The owner's framing ('we're aligned') is exactly the problem: alignment with the client's desired number is misalignment with the evidence.
Key points:
- Contingent fees based on the value conclusion or its acceptance are generally prohibited for valuation engagements because they incentivize advocacy over objectivity.
- A fee contingent on a transaction closing (e.g., a percentage of sale proceeds) is a different structure but still requires careful analysis; if it ties compensation to the number you opine, decline.
- The preliminary indication of ~$24M versus the $30M threshold makes the conflict concrete: the bonus would reward you for reaching a number your work does not support.
Response: decline the value-contingent bonus, explain why in writing, and offer a fixed or hourly fee. Document the request and refusal.
2. Address the brother-in-law sign-off and the confidentiality request.
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Brother-in-law sign-off. Allowing another practitioner to 'glance and sign' a report he did not perform is a misrepresentation of responsibility and a violation of the certification requirement (the signer must have actually performed or supervised the work and take responsibility). It also misleads readers about who did the analysis. Decline; the report must be signed by those who did the work and can support the conclusions.
Confidentiality vs. the minority partner. You owe confidentiality to your client, but you must not participate in a scheme to deprive a minority holder of a contractual right of first refusal. The ROFR is a legal right; facilitating its circumvention could expose you and the client to liability and is inconsistent with integrity. You should:
- Decline to structure the engagement to evade the ROFR.
- Advise the client to obtain legal counsel on the ROFR obligations.
- Keep confidential what you are entitled to keep confidential, but do not affirmatively help conceal a sale in breach of the agreement.
Document both discussions.
3. Your preliminary indication is ~$24M but the client 'needs' $30M. How do you manage the engagement and the relationship?
Read the worked answer
Manage expectations early and in writing:
- Communicate the preliminary range and the evidence behind it before the final report, so the client is not surprised.
- Explain that the conclusion follows the evidence, and that you will test whether $30M is supportable - e.g., are there synergies a strategic buyer would pay for (investment value vs. fair market value)? Are there normalization adjustments or growth assumptions that legitimately raise value?
- Distinguish standards of value. A strategic buyer's investment value might exceed fair market value; clarify which the client needs.
- Do not reverse-engineer assumptions to hit $30M. If the client insists, explain the consequences and consider withdrawing if pressure continues.
- Document all communications and the basis for the final conclusion.
Protect objectivity; the relationship is secondary to the integrity of the opinion.