Jointly retaining a single business valuation expert in buy-sell transactions and all types of disputes over value is becoming increasingly common as company owners seek ways to streamline the valuation process, protect their companies and control costs. Naming one appraiser in buy-sell agreements, versus traditional formula and select 3 appraisers upon trigger approaches, is also becoming more popular. In this slightly long-winded rant, I will discuss the pros and cons of using one appraiser that all parties know and trust, and explain why you should give serious consideration to this option.
Where this Thought Process Started for Me
Exit Strategies has provided valuation services for many California companies going through involuntary dissolution processes. Involuntary dissolution proceedings, per California Corporations Code § 1800 and § 2000, give minority shareholders who feel they have been victimized by those in control of a corporation to force a liquidation or sale of the company unless the company or its majority owners agree to buy them out at fair value. CC § 2000 stipulates that, “The court shall appoint three disinterested appraisers to appraise the fair value of the shares …”. Often, the judge in these cases requires that the appraisers work together to develop a conclusion of value.
What’s interesting to me is that in every CC § 2000 case where I worked collaboratively with other competent appraisers from start to finish, we were able to reach agreement on a conclusion of value. I’ve talked to several other BV experts who have also had overwhelmingly positive experiences on such panels.
So, why do appraisers, working separately, reach different values?
I see three main reasons why Qualified (experienced and professionally accredited) valuation experts selected by opposing parties and working in isolation from each other are more likely to conclude different values for the same business:
- They have different facts. They ask different questions about the company, often of different people with different agendas, and using different information they arrive at different conclusions. Makes sense, right? Conversely, when appraisers receive the exact same inputs on a company, they are far more likely to produce similar values. If you hire multiple appraisers, be sire that they are working with the same information. More on that later on.
- They head off in different directions. Subtle differences in scope of work can have substantial effect on valuation results. Appraisers using different standards or levels of value for example, are guaranteed to report different values. I’ve seen situations where one appraiser reported equity value and another reported a debt-free minimal asset sale value. It’s also common to see different valuation dates. Often, the clients don’t even realize they are setting themselves up for disagreement. And the appraisers don’t know because they are working in isolation. These differences should be resolved in advance.
- Bias. Even though appraisers are supposed to be impartial, some succumb to pressure to deliver a result that favors the party that selected them or satisfies the attorney that hired or referred them. Ask around and you’ll learn that Exit Strategies’ professionals assiduously refuse to let bias creep in to valuation engagements and will only advocate for our opinion. (M&A advisory is a different story. There we absolutely advocate for our clients.)
Now, CC § 2000 cases are fairly infrequent, and usually the parties decide how many appraisers to hire. As this point you may be thinking, “wait a minute, doesn’t each shareholder need to have their own appraiser?” Let me turn that question around…
If a panel of appraisers working together generally see eye-to-eye, why have more than one?
The main argument for having multiple appraisers (besides putting more appraisers to work!) is that it can guard against an outlier opinion or one appraiser making an honest mistake. If you are careful in selecting the appraiser, however, you can mitigate these risks.
Another obvious disadvantage to having multiple appraisers is cost. Not only do the parties have to pay for 2 or 3 valuations, but appraisers generally charge more when they know they’ll be working in an antagonistic and uncooperative environment or when they know their report is likely to be challenged in litigation. The reason; more hours of work.
An often-overlooked and very important disadvantage of hiring multiple appraisers is the deleterious effect it can have on shareholder relationships and the company itself. The perception of having an appraiser in their corner promotes divisiveness between owners. They become suspicious of the other expert(s). And doubling or tripling the number of information requests, interviews and follow up questions increases management’s workload, distracts them from running the business and prolongs the valuation process. As the rift between owners grows and the company drifts, value erodes for all shareholders. It can be a real mess.
This seems to be a good point to summarize the advantages of a using single, jointly-retained business valuator — lower cost, less work and distraction for management, better shareholder cooperation, reduced likelihood that information will be withheld or biased, less danger of advocacy, and scope of work clarity. Next, let’s discuss how you go about selecting and working with a joint BV expert.
3 Keys to Success When Using a Jointly Retained Business Valuation Expert
- Get to know the expert. How do you establish trust between all parties and the appraiser at the outset? Start by requiring professional business valuation credentials, several years of relevant BV experience, and real-world business transaction expertise (not just financial theory). Ask around for recommendations. Have both parties swap lists and see who appears on both lists. The parties should jointly interview appraisers until they find one that they are all comfortable with.
- Correctly define the engagement, i.e. standard of value, subject interest, level of value, scope of analysis, type of report, valuation date, etc. Many buy-sell agreements and jurisdictions do not have well-defined valuation criteria. A trusted and Qualified BV expert can point out the various interpretations and work with the parties and their legal advisors to resolve them. If the parties want, they can have the appraiser produce different values based on different interpretations, often for little extra cost.
- Require open communication. Set ground rules to include all shareholders, and advisors (attorney, CPA, etc.) in some cases, in all communications with the valuation expert throughout the process. All shareholders should have access to all information requests and documents provided, be copied them on emails, be invited to fill-out and review questionnaire responses, be invited to all live interviews, presentations and meetings, and be given the opportunity to review and give feedback on a draft valuation report.
Getting to Trust the Appraiser
Successful jointly-retained experts have integrity and strong interpersonal skills. You can get a sense of who they are by looking at their website and LinkedIn profile. Are they transparent and forthcoming with information? Can they write? Are they involved in their community and is there evidence that they give back to their profession? Etc. Chances are, someone from a pure litigation support firm with little or no digital footprint isn’t right for this job.
In our experience, when we are jointly-retained, the parties are naturally more open and honest about company operations, strengths/weaknesses, risks and future prospects. Separate experts rarely get the full-access 360-degree view that a single expert with the support and cooperation of all parties gets. They do better work and trust in them grows.
I often say there’s no better way to develop trust with someone than to work together to complete a project. If you know you’ll need an appraiser to set a share price for an imminent buy-sell transaction, don’t wait for the trigger event to identify one. Select one in advance and go through the valuation process together when there isn’t as much at stake. You and your partners will get to know the appraiser and the quality of their work. Further, the appraiser’s knowledge of the company and its industry will grow and they can probably recommend strategies to enhance the value of your company which will benefit all shareholders and more than pay for the extra appraisal.
So, the next time you need an accurate business valuation or are preparing shareholder agreements, think about using a single Qualified BV expert. Feel free to call us to discuss your needs and circumstances, or ask your attorney to contact us, in total confidence. We will let you know if we think this is good option for you.
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Al Statz is President and founder of Exit Strategies Group, Inc. which has four California offices and has been selling and appraising businesses since 2002. He is an accredited business appraiser (ASA and CBA) and a Merger & Acquisition Master Intermediary (M&AMI) and can be reached at 707-781-8580 or email@example.com.