The purpose of the third appraiser in multiple appraiser valuation process buy-sell agreements is to bring the process to a conclusion.

Sometimes, things just aren’t queued up for him or her to do the job without some adjustments to the process.

Choosing the Third Appraiser

Over the last several years, I’ve been involved in several multiple appraiser valuation processes as the third appraiser.  These experiences provide the basis for a few ideas to “fix” a process that is already underway and headed for almost certain trouble for one or more of the following reasons:

• In some cases, when the call comes, there have already been two appraisals that are not close together in their conclusions.
• In other cases, there has been a failure to negotiate a value and two appraisers have been selected (one by the selling shareholder and one by the company) for the purpose of picking a third appraiser.
• Often, no information is provided in the buy-sell agreement regarding required qualifications for the appraisers.  The first two appraisers often differ in terms of background, qualifications, and independent valuation experience.  At this point, they have to agree, regardless of prior instructions or lack thereof.
• In some cases, even though the first two appraisers are supposed to select the third appraiser, the buy-sell agreement is not clear on what party(ies) will pay the third appraiser’s fees.  This must be resolved.
• And so on…

Often, the call to be the third appraiser comes from one of the two selected appraisers who is trying to create a short list of qualified appraisers, one of whom, hopefully, will be acceptable to the other appraiser (and his or her client).

Then, if the a prospective third appraiser raises issues like in this post, the appraiser must then go try to explain all this to the client and the other appraiser and that client, as well.  That can be frustrating, and often the matter dies at that point (with respect to me) and the process goes on, likely without addressing the issues.

Most of the time, there is some sense of urgency to get the third appraiser selected and on board.  In some cases, the process has already been long and tortuous.  But everyone is cautious, because no one knows what will happen when the third appraiser is selected.  At this point, I try to slow things down a bit.

What Kind of Value?

I always ask to see the buy-sell agreement so that we can talk about the process that is called for therein.  Sometimes, the kind of value to be determined is unclear.  So I say that this is not my decision.  We have to get agreement among the parties if the value is to be “fair market value at the financial control level” or some other kind of value.

There can be no surprises with unexpected or unexplained control premiums or marketability discounts if the process is to work.  I ask that the parties agree on both the standard of value (like fair market value) and the level of value (like financial control) as part of the selection process.

What Process Will the Third Appraiser Follow?

Most buy-sell agreements provide little description of the process to be conducted by the third appraiser.

• If there are prior appraisals, I ask to see them.  I can tell from the appraisals if there were problems with the prior question.
• How long will the third appraiser have to conduct the appraisal?  Many agreements suggest 30 days which, in this kind of situation, isn’t enough time.
• How will communications between the parties occur?  Unless the communication process is transparent, there will likely be distrust and dissatisfaction with the process.
• Who will be present at the third appraiser’s management interviews?  Or who will the third appraiser speak with?  In most cases, the parties are at odds with each other, and there may be a lack of trust between them.  It is essential to talk with anyone who believes that they have meaningful contributions to the third appraiser’s process.  The appraiser can determine what was meaningful or credible, but if parties are ignored, the potential for future problems increases.
• Will the third appraiser provide a draft report for review by all the parties?  I always suggest that the parties agree to this step.
• Who will receive the draft report?
• How will the third appraiser consider comments from either management or the selling shareholder(s) and their counsel?  And how long will be allowed for these comments?
• Since the parties are already, in many cases, unhappy with each other and the situation, don’t be surprised if the third appraisers asks to be paid in full prior to issuing a draft.
• At some point, the third appraiser must render his or her final report.  I normally suggest simultaneous release by email to the pre-determined distribution list.

In Summary

The general steps outlined above will not solve every problem with appraisals by third appraisers in multiple appraiser buy-sell agreements.  However, they will go a long way towards “fixing” processes that are otherwise broken, or badly bent.

You might be interested in the following articles:

• Multiple Appraiser Process Buy-Sell Agreements
• Often Overlooked Yet Important Items in Process Buy-Sell Agreements

To find out even more about the issues  mentioned in this post, continue to read this blog.  You can accelerate the learning process by getting the book Buy-Sell Agreements for Closely Held and Family Business Owners.

And keep reading this blog (and share it with your friends, advisers, and colleagues), because we’ll be providing fresh insights as we continue to explore buy-sell agreements and how to make them work.