Valuation Process Buy-Sell Agreements

Another type of buy-sell agreement is known as a valuation process agreement.  Under this type of buy-sell agreement, a process is set forth that will direct the selected third party appraiser(s). Thus, a valuation process agreement is much different than a fixed price or formula type of buy-sell agreement.  The owners are essentially agreeing on a process to value the company at a future date.  The valuation process can involve one or more business appraisers that will value the company as of the triggering event.  With a multiple appraiser process agreement, you will have a minimum of two separate appraisers determining the price.  A single appraiser process agreement is where one appraiser will be selected to determine the price.  Please recognize that multiple appraiser agreements can get quite labor intensive and can be very expensive.  I typically view the single appraiser agreement as the best option in this category – due to the quagmire that often ensues when two or more appraisers are involved. 

It is critical that the valuation process agreement specify what the appraiser(s) will be doing and identify the standards to apply.  If the elements are not laid forth, then the appraiser(s) will have to use their own judgment and/or make assumptions.  Some of the most important elements to define in a valuation process agreement are as follows:

1.       Define the standard of value to be used by the appraiser(s). 

2.       Define the level of value to be used by the appraiser(s). 

3.       Define the valuation date to be used by the appraiser(s).

4.       Define what business valuation standards will be used by the appraiser(s). 

5.       Specify whether the appraiser(s) will be required to have certain valuation credentials. 

There are many more elements to consider, but the above will lay the road map for the appraiser(s) in the buy-sell agreement. The next few posts will dive deeper into these critical factors.