In the July 26, 2012 issue of NACVA‘s Quick Read Industry Buzz newsletter, the article “How to Set Up Buy-Sell Agreements: Recommended Valuation Process for Buy-Sell Agreements – The Single Appraiser” was featured.
The article, excerpted from my book Buy-Sell Agreements for Closely Held and Family Business Owners, explains the Single Appraiser: Select Now, Value Now valuation process. The advantages of this valuation process are:
The Single Appraiser, Select Now and Value Now process provides several distinct advantages relative to other process agreements, including:
- The structure and process, in addition to being defined in the agreement, will be known to all parties to the agreement in advance.
- The selected appraiser will be viewed as independent with respect to the process; otherwise, he or she would not have been named. At the very least, the suspicion of bias is minimized.
- The appraiser’s valuation approaches and methodologies are seen first hand by the parties before any triggering event occurs.
- The appraiser’s valuation conclusion is known at the outset of the agreement by all parties and becomes the agreement’s price until the next appraisal, or until a trigger event between recurring appraisals occurs.
- The process is observed at the outset; therefore, all parties know what will happen when a trigger event happens.
- The appraiser must interpret the valuation terms of the agreement in conducting the initial appraisal. Any lack of clarity in the valuation-defining terms (“the words on the pages”) will be revealed and can be corrected to the parties’ mutual satisfaction.
- Having provided an initial valuation opinion, the appraiser must maintain independence with respect to the process and render future valuations consistent with the instructions in the agreement.
- Because the appraisal process is exercised at least once, or on a recurring basis, it should go smoothly when employed at trigger events and be less time-consuming and less expensive than other alternatives.One further element can improve the Single Appraiser, Select Now and Value Now option even more – regular reappraisals. In my opinion, most companies with substantial value (beginning at $2 to $3 million of value) should have an annual revaluation for their agreements. For most such companies, the cost of the appraisal process is insignificant relative to the certainty provided by maintaining the pricing provisions on a current basis. Owners who view the cost of an annual reappraisal as excessive should have the reappraisals every other year.