We recommend the "Single Appraiser – Select Now, Value Now" process for buy-sell agreements. In this process, the appraiser is not only named in the agreement, but he or she is engaged to provide an initial appraisal for purposes of the agreement. We at Mercer Capital have long recommended that parties creating buy-sell agreements with a named appraiser have the appraiser perform a baseline appraisal pursuant to the terms of the agreement. This option provides several distinct advantages relative to other process agreements, including:

• The structure and process, in addition to being defined in the agreement, will be known to all parties to the agreement in advance.
• The selected appraiser will be viewed as independent with respect to the process; otherwise, he or she would not have been named. At the very least, the suspicion of bias is minimized.
• The appraiser’s valuation approaches and methodologies are seen first hand by the parties.
• The appraiser’s valuation conclusion is known at the outset of the agreement by all parties and becomes the agreement’s price until the next appraisal, or until a trigger event between recurring appraisals occurs.
• The process is observed at the outset; therefore, all parties know what will happen when a trigger event occurs.
• The appraiser must interpret the valuation terms of the agreement in conducting the initial appraisal. Any lack of clarity in the valuation-defining terms will be fleshed out and can be corrected to the parties’ mutual satisfaction.
• Having provided an initial valuation opinion, the appraiser must maintain independence with respect to the process and render future valuations consistent with the instructions in the agreement.
• Because the appraisal process is exercised at least once, or on a recurring basis, it should go smoothly when employed at trigger events and be less time-consuming and less expensive than other alternatives.

One further element can improve the "Single Appraiser – Selection Now, Value Now" option even more – regular reappraisals. In our opinion, larger companies should have an annual revaluation for their agreements. By larger, we mean those for which the cost of the appraisal process is insignificant relative to the certainty provided by maintaining the pricing provisions on a current basis. Smaller companies should have reappraisals every two years, or at least, every three years. Additional benefits from annual or periodic reappraisal for buy-sell agreements include:

• The parties will tend to gain confidence in the process.
• The parties will know the most current value for the buy-sell agreement.
• Importantly, because the appraisals are recurring in nature, the appraisal firm’s knowledge of a company’s business and industry will grow over time, which should further enhance the confidence all parties have in the process and conclusion of value.

In summary, the "Single Appraiser – Select Now, Value Now" process is, based on our experience, the most reasonable valuation process for many privately owned businesses.