Engagement Acceptance, Scope, and Data Gathering
Core concepts
Before numbers, define the engagement. A sound engagement letter specifies the subject interest, standard and premise of value, valuation date, intended use and users, scope, report format, assumptions and limiting conditions, fees, and responsibilities of both parties. Scope must match the assignment: site visits, management interviews, internal document review, external research, and financial projections all carry cost and reliability trade-offs.
Data gathering has two streams. Internal: financial statements (audited, reviewed, compiled, internal), tax returns, budgets, projections, customer and backlog data, compensation schedules, buy-sell and operating agreements, leases, debt documents, and litigation history. External: industry reports, economic indicators, public comparables, transaction databases, and guideline company data. Triangulate-reconcile tax returns to financial statements and investigate unexplained differences, since small-business statements are often tax-driven.
Traps
- Accepting management projections without testing reasonableness against history and industry.
- Missing ownership agreements (buy-sell, shareholder, partnership) that legally restrict transferability and may set a formula price.
- Overlooking related-party transactions and below-market compensation or rent.
- Assuming unaudited statements are wrong-they may be reliable, but must be understood and normalized.
- Ignoring subsequent events between the valuation date and report date where standards permit their use.
Worked rule of thumb
Use a document request checklist organized by category (legal, financial, operational, market). If a key document is unavailable, disclose the limitation and assess whether it impairs the opinion-do not silently substitute assumptions. If management refuses access to tax returns, consider whether the engagement can still support the requested conclusion.
Exam strategy
Questions often hinge on whether scope was adequate for the opinion rendered. Match the depth of procedures to the report type and intended use.