Using an appraiser to value the business
So, you have found a buyer for your business but there is a significant difference in the offer and the asking price. One common method to handle this issue is for both parties to agree to use appraisers to determine the value of the business. If appraisers are going to be used to determine price in a valuation process, they need instruction regarding the specifics the parties to a buy-sell agreement are seeking. The agreement should define the issues/guidelines the appraiser(s) will use to provide the valuation.
1. Standard of value
2. Level of value
3. The “as of” date
4. Qualifications of appraisers
5. Funding mechanism
Standard of value
Will the pricing value be based on “fair market value” or “fair value” or some other standard? If the standard of value provision in a buy-sell agreement is not clear, appraisers may have to decide what the written words mean—a decision they may prefer not to make. Or the parties, whose interests have already diverged, will have to agree on a standard of value to provide instructions to the appraiser(s). Neither situation is ideal.
Level of value
The levels of value suggest a range of values, from the strategic controlling interest level of value of the enterprise as a whole, to the non-marketable minority interest level of value applicable to illiquid, minority interests. This lack of direction leads to some of the largest variations in valuation opinions by appraisers. These differences almost inevitably arise from absent or ambiguous specifications regarding the applicable level of value in particular agreements. For example, is the company valued from the perspective of a non-marketable minority level or as a strategic acquisition? Situations like this can and do happen and they are never pretty in their resolution, nor are the parties generally satisfied with the ultimate results.
The ‘as of’ date
The effective date of an appraisal is often called the “as of” date. It is the date the appraisers will use to assess the economic environment and the facts known about the company at that exact date on which they base their valuation.
Qualifications of appraisers
Buy-sell agreements are often silent regarding the qualifications of appraisers. Parties to buy-sell agreements should consider appraiser qualifications when agreeing on an appraisal process. The logical requirements become apparent as parties begin to reflect on individual appraisers and appraisal firms. Therefore, the qualifications of appraisal firms should be specified based on their size, the scope of their business, and perhaps, on their specific industry expertise.
The Funding Mechanism
The agreement should have a funding mechanism designed to ensure that the agreed-upon value will first, be affordable to the company (cash flow, financeable, viable assets etc.); and second, realizable by the seller. The funding mechanism is an essential business element of buy-sell agreements but only part of the due diligence process.
Comments