Dr. Ashok Abbot, a professor at West Virginia University, a business appraiser, and a well-known speaker, has written a review of my book, Buy-Sell Agreements for Closely Held and Family Business Owners. This review appears in the Fall 2010 issue of Business Valuation Review.
This short post highlights some of his comments:
- This book … is aimed at business owners and the stated purpose is to provide an active tool to help business owners, their lawyers, and other advisors in crafting workable buy-sell agreements.
- … this is three books in one, a pitch book for business advisers, a quick refresher for appraisers, and a primer for business owners.
- Chris Mercer has reinvented his writing style …
- This is a well-written book. It place issues that a large portion of business owners either do not anticipate, or are uncomfortable talking about, front and center.
Ashok describes the book as having three parts. Part one is diagnostic and provides tools for business owners (and particularly, for business advisers, including business appraisers). Part Two provides a primer for business owners, a description of the execution part of buy-sell agreement formulation, and a recap of the key concepts of the book. Part Three provides a quick introduction to advanced valuation issues that could impact the buy-sell agreement process.
The review concludes:
… The biggest contribution of this book may lie in emphasizing the importance of crafting well-drafted, unambiguous, and comprehensive buy-sell agreements, put in place and reviewed periodically to avoid the unintended consequences.
Ashok notes that I strongly advocate a single appraiser approach in the book. In fact, I call what I believe to be the preferred buy-sell agreement process the Single Appraiser, Select Now, and Value Now Process. This process, in summary:
- Requires the participants to a buy-sell agreement to agree on a single appraiser for purposes of their agreement. This means that they would agree on the appraiser and his or her qualifications, as well as the valuation standards under which any appraisals would be rendered.
- The appraiser would provide a draft valuation opinion for all parties. This draft would insure that the appraiser has interpreted the agreement’s definition of the valuation assignment (appropriate standard of value, level of value, as of date …), and provide an opportunity for all parties to get familiar with the appraisal process. If there are problems with the value specification or with the process, such issues can be fixed before the report is finalized. Once the report is finalized, its conclusion becomes the price for purposes of the agreement until the next appraisal.
- Following the initial valuation, the selected appraiser would provide an annual (or every other year, as agreed) reappraisal, which would then become the new price.
This Single Appraiser, Select Now and Value Now Process for determining the price for a buy-sell agreement eliminates most of the uncertainty normally attached with price determination.
- Fixed price agreements are seldom updated, and a price needs to be determined after a trigger event when the interests of the parties have diverged.
- Formula agreements are often unclear and do not provide for sometimes necessary adjustments for reasonable valuation.
- Multiple appraiser processes are not invoked until after a trigger event has occurred and the interests of the parties have diverged. Further, in most cases, the agreement has not been triggered before and no one knows how the process will work, adding to the uncertainty of the situation.
I recommend the Single Appraiser, Select Now and Value Now Process because I know it is good for businesses and their owners.
In addition to providing annual revaluations for the buy-sell agreement, this single appraiser process provides current and continuing information about valuation and financial performance that is helpful for personal financial planning and gift and estate tax planning.
The annual appraisal also provides an objective basis for other transactions in company stock that occur apart from buy-sell agreements.
Thanks, Ashok, for providing this opportunity to share your thoughts and some of mine.