Many buy-sell agreement templates call for an appraisal process to resolve the price (i.e., the valuation) for transactions under companies’ agreements upon the occurrence of specified trigger events. We call such agreements process agreements. Quite often, the descriptions of the valuation processes are quite short. A representative example might go like this:
Price. The Purchase Price per share for the Shares to be purchased shall be the Agreed Value divided by the number of shares outstanding. If there has been no Agreed Value within ___ months of the event giving rise to the determination, the parties may, within 30 days, mutually agree upon such a value. If, within 30 days no such agreement has been reached, the Company shall select an appraiser and the Selling Shareholder shall also select an appraiser. The selected appraisers shall, within 60 days of being retained, provide their opinions of the fair market value of the Company (“Appraised Values”). In their determinations of their Appraised Values, the appraisers shall determine the fair market value of the shares of the Company. They shall apply no discount for the fact that any shares represent a minority interest or due to the fact that they lack marketability. If the two Appraised Values are within 10% of each other, the Purchase Price shall be the average of the two Appraised Values. If the two Appraised Values are not within 10% of each other, the two selected appraisers shall mutually agree upon a third appraiser. The third appraisers will determine his opinion of Appraised Value. The Purchase Price shall then be determined by the average of the third Appraised Value with that of the first two Appraised Values closest to it.
There are a number of problems with this price determination clause. We call the process by which the called-for Purchase Price is to be determined “Two and a Tie-Breaker.” The third appraiser’s role is to break the logjam and resolve the valuation issue.
Quite often, the parties to buy-sell agreements have only the vaguest notion of how the processes in their agreements might work. Reading the sample text above, things seem like they might work fairly simply. However, in operation, things are less simple and often not smooth at all. It takes time to get an appraisal process started, for example. If the buy-sell agreement is triggered by the death of a shareholder, there is a natural grieving process that must take place before his or her family can engage in a process. When the process begins, time can drag on for a variety of reasons:
The bottom line is that it can take a long time – 6-12 months or even longer, for the typical appraisal process to work itself to resolution. The processes often leave all parties dissatisfied, feelings hurt, relationships damaged, or worse.
Articles , Buy-Sell Agreements