Category: evaluations

Single Appraiser vs. Multiple Appraiser Choices

by YOUR BUSINESS WORTH, posted in Buy and Sell Agreements, Company Wealth, evaluations, Funding your Buy and Sell, Selling Your Business, Uncategorized, Valuation, Working On Your Business

This month I wrote about multiple and single Appraiser choice.  My friend Ed Pratesi was nice enough to give me some of his thoughts, which I definitely respect due to his experience and training.   Ed, thank you for this contribution.

Ed Pratesi wrote:

I read with interest your comments on Single Appraiser vs. Multiple Appraiser choices that owners have for a BSA. I agree in part with your assessment that the single appraiser choice is preferred but I do have a number of caveats and suggest that before the number of appraisers needed is secondary to choices made before this decision. Let me explain my thoughts:

Firstly, the choice of number of appraisers almost always works, whether one, two or the three step approach – except when it doesn’t!

Prior to the determination of the number of appraisers needed is preceded by what I refer to as the education process that a business appraiser must take the owners through in order to develop an agreement and a process that will likely be triggered when an unanticipated or unfortunate event has occurred.

In never ceases to amaze me that owners will spend money on creating a business plan, invest in physical assets and talent and not spend enough time on one of the most important events that will occur in their lives – either their exit or a partners exit. My complaint is not pointed at the owners but at the appraiser called in to initially called in to assist in the valuation.

My point simply is the an appraiser needs to explain the valuation process, the valuation methods used to value a business, the applicability or not of the methods to the company, a discussion of the definition of value – (for example fair market value or fair value, more on this in a later discussion), a complete discussion of adjustments that appraiser consider in the valuation process, and what discounts could apply and the reasons for application of discounts.

This part of the valuation process is more consultative and sets the framework for the conduct of an initial appraisal and of the work product. Finally, once the appraisal is complete a meeting to discuss the results and the process is essential and should be prefeaced with scenario planning should a provision of the BSA be triggered.

The goal is to get buy-in on the process not just the number!

I hope I have addressed part of the discussion of the number of appraisers – more to follow if desired…

Ed Pratesi

Edward E. Pratesi, ASA, CM&AA, ABV, CVA

Managing Director | UHY Advisors N.E., LLC
6 Executive Drive, Farmington, CT  06032
D: 860 519 5648 | C: 860 558 0453 | F: 860 519 1982

epratesi@uhy-us.com |  www.uhyvaluation.com

www.linkedin.com/in/ed-pratesi-140b762

 

Single appraiser Buy and Sell Agreement!

by YOUR BUSINESS WORTH, posted in Buy and Sell Agreements, Company Wealth, evaluations, Funding your Buy and Sell, Selling Your Business, Valuation

An alternative to the multiple appraiser agreement, is the single appraiser agreement (SAA).  There are two single appraisers’ processes. I

  1. Single appraiser, select now and value now
  2. Single appraiser, Select and Value at Trigger Event
  3. Single appraiser, Select Now and Value at trigger event

The preference is #1:

However, #2,3 are stopgap processes which can be used.  As mentioned in both of these types, the value is delayed to sometime in the future. 

Postponement of the appraiser selection and initial valuation create substantial uncertainties and potential for disagreements   or disputes.

The SINGLE APPRAISER, SELECT NOW AND VALUE NOW OPTION

In the BSA, the appraiser is named and is engaged to provide an initial appraisal for purposes of the agreement.

SELECT NOW: At the creation of the BSA, the appraiser is named. All parties have a voice and can exercise their choice as difficult as it may be.

VALUE NOW:  The chosen appraiser provides a baseline appraisal for the purpose of the agreement.  In this method, it is recommended that the value be presented in draft and give each party a time period for consideration before entering it in the final BSA. 

VALUE EACH YEAR (OR TWO) THEREAFTER:  This provides great advantages:[i]

  • Structure and process
  • Known to all parities
  • Selected appraiser is viewed as independent
  • Values are seen before triggering event
  • Since a draft will be provided to the participants, they can review for corrections to the mutual satisfaction
  • The appraiser’s conclusion in known up front and is the price until the next appraisal, or until a trigger event
  • Because the process is exercised at least once, it should go smoothly when employed at trigger events, less time consuming and less expensive than other alternatives

The single valuation process also helps the estate planning process with the annual reappraisals which will facilitate the estate planning objectives of the shareholders. For example, if the planning calls for minority discounts, the supplemental valuations at the not marketable minority level for gift and estate purposes.

[i] This type of valuation process will accommodate most small companies as for many reasons listed above.