| Buy-sell agreements exist in many, if not
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| | Standard of value. Will the value be
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| most, closely held businesses having
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| | based on "fair market value" or "fair
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| substantial size and/or value. And they
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| | value" or some other standard. These
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| exist between corporate joint venture
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| | words can have dramatically different
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| partners in many thousands of
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| | interpretations. Some agreements simply
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| enterprises.Buy-sell agreements are
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| | specify "the value" of the company or
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| agreements by and between the
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| | interest. What's an appraiser to do then?
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| shareholders (or equity partners of
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| | Which value? The likelihood of a
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| whatever legal description) of a
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| | successful appraisal process diminishes
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| privately owned business and, perhaps,
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| | greatly if this critical defining issue
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| the business itself. They establish the
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| | is not clear.2. Level of value. Will the
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| mechanism for the purchase of stock
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| | value pursuant to the buy-sell agreement
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| following the death (or other adverse
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| | be based on a pro rata share of the value
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| changes) of one of the owners. In the
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| | of the business or will it be based on
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| case of corporate joint ventures, they
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| | the value of an interest in the business?
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| also establish the value for break-ups or
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| | The differences bring minority interest
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| for circumstances calling for one
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| | and marketability discounts into
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| corporate venture partner to buy out the
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| | potential play, and wide differences in
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| other partner.Buy-sell agreements (or put
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| | interpretations of value. Two appraisers
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| agreements in some cases) are more
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| | could agree regarding the value of a
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| important than most business owners,
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| | business, but if one applies a
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| shareholders and boards of directors
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| | marketability discount, their conclusions
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| realize. I've often said that buy-sell
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| | can be significantly different, and
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| agreements are written under the
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| | confusion results. This is an issue that
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| assumption that the other partner is
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| | needs to be crystal clear in your
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| going to die first - and one of the
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| | agreement.3. The "as of" date for the
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| partners is right!Seeing two different
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| | valuation. Believe it or not, some
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| buy-sell agreements recently put the
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| | buy-sell agreements are not clear about
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| topic at the top of my mind and triggered
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| | the date as of which the valuation(s)
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| a couple of memories, as well.Never
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| | should be determined by appraisers. This
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| UpdatedThe other day I reviewed a
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| | can be extremely important, particularly
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| buy-sell agreement that was perfectly
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| | in corporate partnerships and joint
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| fine on the day it was signed by a
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| | ventures when the occurrence of events
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| company's two major shareholders - more
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| | other than the death of a partner
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| than ten years ago. The agreement states
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| | typically establishes a valuation date.
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| that the parties will reset the value
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| | We were involved in major litigation a
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| each year.Since then, the company has
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| | couple of years back where it took two
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| more than tripled in size and value.
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| | arbitrations and several nationally known
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| However, the valuation in the buy-sell
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| | appraisers to resolve what was a dispute
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| when it was signed remains in effect
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| | over the appropriate valuation date.
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| today because it was never updated.This
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| | Fortunately for our client, the
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| creates no significant problems - unless
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| | arbitration panel agreed with our
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| something adverse happens to one ofthe
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| | interpretation of the buy-sell agreement
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| shareholders. In that case, one
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| | from a
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| shareholder would benefit from a bargain
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| | valuation viewpoint.4. The funding
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| purchase price and the other's family
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| | mechanism. Many buy-sell agreements do
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| would suffer a true economic loss. With
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| | not provide a specific funding mechanism,
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| this item now in the open, those
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| | either through insurance, sinking funds,
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| shareholders are working to update the
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| | or pre-agreed payment terms. An agreement
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| document as rapidly as possible.Formula
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| | is no better than the ability of the
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| PricingMany business owners want to
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| | parties and/or the company to fund any
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| create a formula to establish the pricing
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| | required purchases at the agreed upon
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| if a buy-sell agreement is triggered. And
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| | price.5. Qualifications of appraisers.
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| quite a few buy-sell agreements have
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| | Some buy-sell agreements provide a
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| them, usually with disastrous long-term
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| | specific list of firms that the parties
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| results. However, this is not uncommon
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| | agree are mutually acceptable, either for
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| because this is an inexpensive
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| | a single appraiser option or for the
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| alternative to hiring a business
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| | multiple-appraiser options. In other
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| appraiser. Almost anyone can put a few
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| | cases, the specific, individual
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| numbers into a formula, whether it calls
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| | qualifications of appraisers are spelled
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| for book value at the preceding fiscal
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| | out (e.g., credentials from a major
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| year-end or 4.5 times a 3-4-5 year (pick
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| | credentialing organization, experience in
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| one) average EBITDA - less debt, of
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| | appraisal, experience with the industry,
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| course. (I've actually seen the exclusion
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| | etc.).Credentials can be important. I
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| of debt to determine equity value omitted
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| | reviewed a draft buy-sell agreement for
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| as part of the formula!)The questions is,
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| | an acquaintance a couple of years ago.
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| will formula results be fair for both
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| | His company was a $100 million, highly
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| sides in all circumstances? I won't prove
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| | successful service organization. The
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| it here by boring you with multiple
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| | draft buy-sell stated that the appraiser
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| examples, but no rigid formula can
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| | should be an "accredited general
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| realistically determine the value of a
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| | appraiser" in the state of
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| business over time with changing company,
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| | domicile. An accredited general
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| industry, and economic conditions. That's
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| | appraiser is qualified to appraise
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| why many buy-sell agreements use an
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| | residential or possibly small commercial
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| appraisal process.Three AppraisersAs
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| | real estate. This error was fixed in the
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| mentioned above, I reviewed two buy-sell
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| | next draft!6. Appraisal standards to be
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| agreements recently. The second agreement
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| | followed. Some buy-sell agreements go so
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| involved the use of what I call
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| | far as to name the specific business
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| "one-two-three appraisers, rock!" The
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| | appraisal standards that must be followed
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| drafters of this type of agreement seem
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| | by any selected appraisers. For example,
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| to believe that if it is good to retain
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| | I have seen agreements that state that
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| one appraiser to value a business, it is
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| | the appraiser(s) must follow the Uniform
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| better to retain two, or even three. As
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| | Standards of Professional Appraisal
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| an appraiser, I suppose I should prefer
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| | Practice and the Business Valuation
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| this mechanism. After all, it increases
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| | Standards of the American Society of
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| the odds of our firm being hired.While I
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| | Appraisers.What's so hard about
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| don't know the genesis of this, many
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| | specifying these things? I've had clients
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| buy-sell agreements are written where the
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| | tell me that they have a hard time
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| valuation mechanism involves multiple
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| | talking about some of these issues with
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| appraisal firms. Variations go like
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| | their fellow shareholders when they are
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| this:1. The buying party shall retain
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| | creating their buy-sell agreements. It
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| one independent appraiser, and the
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| | makes people think about things they
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| selling party another. They will both
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| | don't want to think about. But think
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| provide valuation opinions. If the values
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| | about them you must.The process of
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| are within 10% or 15% or 20%
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| | drafting a buy-sell agreement requires
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| (pick-a-percent), the price for the
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| | the parties to address important issues
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| buy-sell agreement will be the average of
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| | in balanced form at the outset. In doing
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| the two. If they are more than
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| | so, they are forced to realize that each
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| pick-a-percent apart, the price will be
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| | party could be a buyer - in the event of
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| determined by the average of the third
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| | the death of a partner - or a seller.
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| appraiser's value and that of the one
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| | Actually, if one thinks about being a
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| closest to him or her.2. The buying
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| | seller, it is actually his or her estate
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| party shall retain one independent
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| | that will be the seller. This can be
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| appraiser and the selling party a second.
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| | tough stuff to deal with.As I've said in
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| They do not provide appraisals. Rather,
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| | numerous speeches, if you think it is
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| it is their job to mutually select a
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| | difficult to address these issues with
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| third appraiser. Having been one of the
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| | your partner(s) in the here and now, just
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| original two appraisers in several
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| | think how difficult it will be when one
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| situations, I can tell you that this is
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| | of you is in the hereafter!Know this. If
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| not as easy as you might think! This
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| | these defining elements, including the
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| third appraiser will provide a valuation
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| | pricing mechanism, are unclear in your
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| of the business (or interest). The third
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| | (or your clients') buy-sell agreement(s),
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| appraiser's conclusion is the agreed upon
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| | they will be the only thing you will be
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| transaction value. If you are the third
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| | able to think about following a trigger
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| appraiser, that's an awesome
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| | event until the situation is resolved.
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| responsibility, one that I've undertaken
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| | Absent a clear agreement, this can take
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| on several occasions.3. The buying party
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| | lots of money, lots of time, and create
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| shall retain one independent appraiser
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| | lots of hard feelings. And dealing with
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| and the selling party a second. Both will
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| | the issues under adverse circumstances
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| provide valuation conclusions which, if
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| | will absolutely distract you from the
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| close enough together (pick-a-percent),
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| | business of running your business.The
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| will be averaged. If the conclusions are
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| | Bottom LineYou probably don't spend much
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| more than pick-a-percent apart, the
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| | time at night thinking about your (or
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| original two appraisers shall select a
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| | your clients') buy-sell agreement(s).
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| third appraiser. Again, this is not as
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| | Take my word for it, you shouldn't. You
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| easy as one might think. The third
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| | should be thinking about your buy-sell
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| appraiser must then pick one of the two
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| | agreement now, in the light of day, and
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| appraisals as the more correct valuation,
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| | working to get a clear agreement that
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| and that will be the transaction price.
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| | works for you and your fellow
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| That's pretty dicey, too, and I've done
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| | shareholders or partners.I never practice
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| it.And there are probably other
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| | law, because to do so requires a license.
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| variations on this theme.A Single
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| | So I don't have any legal opinions. I
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| AppraiserThere are at least two versions
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| | prefer to think of them as business
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| of the single appraiser pricing
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| | opinions.1. If you are a business owner
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| mechanism.1. The agreement states that
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| | or shareholder and your buy-sell
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| the parties select an appraiser at the
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| | agreement has not been updated within the
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| time of a trigger event. Some buy-sell
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| | last year (or if you don't understand it
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| agreements provide for the parties to
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| | if it has), run, don't walk, to your
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| agree on a single appraiser. If you think
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| | corporate attorney to talk through these
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| it is difficult for two appraisers to
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| | issues.If you or your attorneys don't
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| agree on a third appraiser, it can be
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| | understand the valuation nuances of your
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| even more difficult for two parties with
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| | buy-sell agreement, don't hesitate to
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| adverse interests - and yes, the
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| | bring in a qualified business appraiser
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| interests will be adverse at the moment
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| | to read the agreement from a valuation
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| of a trigger event.There is a great deal
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| | perspective and to tell you what he or
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| of uncertainty in this process because
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| | she thinks it means - or if there is
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| neither party likely has any idea how the
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| | legitimate room for misunderstanding
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| selected appraiser will work or what
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| | between appraisers. Find out what needs
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| their work product will look like. So
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| | to be done, make the necessary decisions,
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| this process can feel something like a
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| | and fix the document. It will never be
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| crap shoot to the parties involved.Once
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| | easier than right now.2. If you are a
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| selected, however, the appraiser provides
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| | trusted adviser to a business owner or
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| an appraisal, and that's the price for
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| | significant shareholder, I would suggest
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| the transaction. Unless, of course, one
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| | making contact for the explicit purpose
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| party disagrees vehemently with that
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| | of discussing the buy-sell agreement and
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| conclusion and litigation ensues.2. The
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| | subjecting it to formal review and/or
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| agreement states that the parties select
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| | revision.3. If you are an executive or
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| an appraiser at the time of the signing
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| | director of a large company with multiple
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| of the buy-sell agreement. I have
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| | joint ventures involving substantial
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| recommended this choice of pricing
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| | resources, you can bring great value to
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| mechanism for years - with a twist. My
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| | your company by requesting a review, from
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| suggestion is that the parties retain a
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| | legal and valuation viewpoints, of all
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| mutually agreeable, independent appraiser
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| | existing buy-sell and/or put agreements
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| at the time of the negotiation of the
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| | with appraisal-type pricing
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| buy-sell agreement. The appraiser
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| | mechanisms.Remember this about buy-sell
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| provides an appraisal, and the parties
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| | agreements - someone will buy and someone
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| agree that this is the initial value for
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| | will sell. You just don't know who that
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| pricing if the agreement is triggered.
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| | will be when you sign the agreement. Your
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| All parties know the appraiser, see the
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| | agreement needs to work for you and your
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| methodologies they (the firm) have
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| | family whether you are the buyer or
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| employed, and are comfortable, at the
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| | seller. And it needs to work for your
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| outset, that the valuation is reasonable
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| | partner(s) and their families (or their
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| and mutually agreeable.The parties then
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| | shareholders) whether they are the buyers
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| agree that the selected appraisal firm
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| | or sellers.This is important. Send this
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| will reappraise the business for purposes
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| | article to any of your friends who own
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| of the buy-sell agreement every (or every
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| | businesses. They will benefit greatly
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| other) year or so, and that the
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| | from taking time to review their buy-sell
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| reappraisal will re-establish the price
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| | agreements. And send this article to
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| for buy-sell transactions. If the
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| | attorneys, accountants, or other advisers
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| appraisal is "stale" at a trigger event
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| | of businesses. They can bring great value
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| (say more than six months or a year or
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| | to their clients by suggesting a review
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| pick-a-period old), the appraiser will
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| | of their buy-sell agreements from legal
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| reappraise as of the date of the trigger
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| | and valuation viewpoints.Z. Christopher
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| event.This form of pricing mechanism has
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| | Mercer is the founder and CEO of Mercer
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| the benefit of relatively greater
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| | Capital Management, Inc., one of the
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| consistency and certainty for all
| |
| | leading business valuation and investment
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| parties. Appraisal methodologies should
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| | banking firms in the nation.Chris has
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| be consistent from one appraisal to the
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| | prepared, overseen, or contributed to
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| next, or else the appraiser should make
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| | hundreds, if not thousands, of valuations
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| explicitly clear the reasons for any
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| | for purposes related to M&A, litigation,
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| methodological changes that influence the
| |
| | and tax, among others. He is a prolific
|
| appraisal conclusion.More Comments on
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| | author on valuation-related topics and
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| StructureIt should be clear that the
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| | one of the most sought after speakers on
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| pricing mechanism in a buy-sell agreement
| |
| | business valuation issues for national
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| can be important to the outcome of a
| |
| | professional associations and other
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| purchase event when it is
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| | business and professional groups.Chris
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| triggered.Before concluding this
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| | also authors a web log, or blog, called
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| discussion of pricing mechanisms, let's
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| | MERCER ON VALUE, which can be found at
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| note some of the other important issues
| |
| | and discusses what he observes in the
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| that need to be addressed when
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| | world and business from the perspective
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| formulating your buy-sell agreement:1.
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| | of value, broadly defined.
|
