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 buy-sell 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 business valuation pursuant to the terms of the buy-sell agreement. This option provides several distinct advantages relative to other process buy-sell agreements, including:

• The structure and process, in addition to being defined in the buy-sell agreement, will be known to all parties to the agreement in advance.
• The selected appraiser will be viewed as independent with respect to the business valuation 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 buy-sell agreement by all parties and becomes the buy-sell agreement’s price until the next appraisal, or until a trigger event between recurring business valuations occur.
• The business valuation 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 buy-sell agreement in conducting the initial business valuation. 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 business valuations consistent with the instructions in the agreement.
• Because the business valuation 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 business valuation for their buy-sell 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 business valuations 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" buy-sell agreement process is, based on our experience, the most reasonable business valuation process for many privately owned businesses.