There are two types of appraiser valuation agreement (AVA). Multiple appraisers and single appraises, while the multiple appraisers (MAVA), are the most common.
How they worked
Usually the BSA calls for a 30-60-day window for the seller and buyer to attempt to agree upon a price. Once the appraisal process is initiated, each party will select an appraiser.
The two will provide opinions of value conforming to the BSA. If their value is within 10% of each other, then the final value will be the average of the two.
If the two appraisals are more than 10%, they will agree on a third appraiser. That appraiser will:
- Provide an appraisal is anaverage in the same way the other appraisers (reconciler)
- Provide an opinion regardless of theother two conclusions.
When BSA are triggered, the corporation and seller separate and go separate ways as there is different motivations. The seller wants the highest price, the purchaser, the lowest price. A good reason why each party should reach an agreement on terms before there is a triggering event, where neither party will be as open minded as they were before a triggering event.
Even with appraisers it is possible that each side will be overseen by multiple sets of attorneys looking out for the interest of the various sides to the transaction.
Thought Processes behind multiple appraisers’ agreements:
Multiple appraisers are intended to bring reason and resolution to the valuation process. This does not always happen, because the parties have 30-60 window to get the appraisers and the evaluations completed. This is more than enough time to irritate each other and taint the process, causing in some cases, the appraisals to be compromised.
Since most multiple appraiser agreements (MAA) base the third appraisal to be an average of the former two if within 10%.
It is easy for each side to believe that the evaluations were bias, especially if the value is more than 10% apart from the initial appraisals. It’s easy to see how even with a third appraisal, the parties can feel appraisers are advocating positions of each party.
Bring in the truly independent appraiser!
Some BSA call for two appraisers to select a third appraiser who is mutually acceptable to them because, to break the logjam.
The third appraiser might be required to select, in his opinion, the more reasonable of the first two conclusions. Or, they may take the average conclusion of the two appraisers add they’re to the mix, and come up with the final evaluation, thus breaking the logjam!
Some processes select two appraisers which their sole function is to mutually agree on the third appraiser whose conclusion will be binding.
It is very easy to understand that the client who hired the appraisal, will try to influence the value of the appraisal. A key point, however, is no matter why and how the appraiser is hired, the key is to make sure the appraiser is to provide independent consultation of value, and one that he or she can support and defend.
Each party comes up with their values. If the value is more than 10% apart, they will generally call upon third appraiser to provide a valuation conclusion. This is averaged with the first two, and that average becomes the price.
Selecting a sole appraiser:
Sometimes the BSA calls for the naming of two appraisers, not for valuation purposes, but to select a mutually agreeable third independent appraiser who become the determiner.
The Judge: 3
This is where the third appraiser is the judge of the two appraisers. If the value is within a certain percentage, the values will be averaged. Ultimately if the two appraisers are considerably off, the judge, selects which of the two appraisals they believe to be the most reasonable valuation, and this becomes the price.
Advantages of multiple appraisers
They provide defined structure or process for determining the price at which future transactions will occur:
- All parties to the agreement know what the process will entail
- Fairly commonand generally understood by attorneys
- Perception to the parties that they think they are protected by the process since they will get to select “their“appraiser
Disadvantages of Multiple appraiser Process
- Price is not determined
- Potential for dissatisfaction with the process,and the results
- Danger of advocacy with multipleappraiser agreements
- Uncertainty regarding the process
- Uncertainty as to the final price
- Process problems are not identified until the process is involved
- Time consuming
- Distracting for management
- Potentially divesting for selling shareholders
Our next blog post for April will be “THE SINGLE APPRAISER AGREEMENT”