Business valuation and client privacy: it’s the law

You may have heard about the attorney client privilege and the legal rules. Professional advisers like accountants and lawyers must comply in order to safeguard client private information.

Business valuation engagements fall in the same realm. For example, a large amount of private client information must pass back and forth between the appraiser and client. Importantly, the appraiser needs to know about the the business, including carefully guarded trade secrets and business strategic plans. Moreover, business appraisals tap into the highly sensitive personal facts about management and key employees.

Attorney-client privilege to protect client privacy

Business people can expect full protection and non-disclosure of their private data whenever they deal with licensed professionals such as accountants and lawyers. The legal framework in such cases is based on the attorney-client privilege. Under the law, the licensed professional must safeguard client information to a very high standard of care. Importantly, any breach of this fiduciary duty exposes the professional to significant legal liability. Unsurprisingly, professionals tread very carefully to protect their clients privacy. And the do so by implementing a set of measures that are fully incorporated into their practice.

Do you delegate your business valuation to a licensed accountant or lawyer? Then you should expect the same level of privacy protection as with any other engagement. Importantly, the private information you hand over to your adviser should never be shared with any third party. This applies to data stored electronically on your adviser’s computer systems.

Web based valuation tools – is your private data at risk?

But, as you might surmise, the real world presents new challenges. A host of web based financial tools popped up trying to lure unsuspecting business owners and advisers, usually on a recurring fee basis.

Web software vendors not responsible to keep your private info safe

More importantly, the highly sensitive private information may wind up in the hands of a third party that is under no obligation to keep it safe and secure. This third party usually manages online servers that store your business and personal data. As a result, your accountant, appraiser or attorney have no say in what types of security measures exist to protect your vital info.

What happens if there is a malicious breach of security and your business critical and personal data are stolen or lost? The web tools vendor does not fall under the professional attorney-client privilege rules. Unless you have signed a full indemnity agreement with the vendor, you have just put yourself at risk.

If you are a professional adviser, you are still responsible to your client under the attorney client privilege. Don’t expect the web based tools vendor to look after your interests in this case. They do not fall under the legal requirements to protect private data of parties that are not their direct customers. Read your license agreement. You will likely not find an indemnity clause that makes the software vendor responsible for the loss of such info.

If you are a business person discussing an appraisal project, ask your service provider if any web based tools outside their full control will be used to manage your private info. Ask your provider about a plan in place to handle loss of such data. If you do not get a satisfactory answer, insist that your business appraiser keep all your information under their full control.

That way all your business and personal info falls under the attorney-client privilege protection.

Keep client private info under your full control

As a business appraiser you can ensure this by keeping all client information directly on your network under your full control. Do not expect that an unrelated web based tools vendor will apply the same level of protection. Under the law, they don’t have to do so, and the additional cost of implementing the security measures will likely be missing from their business plan.

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