The interests of shareholders (or former shareholders) and corporations (and remaining shareholders) often diverge when buy-sell agreements are triggered.

In the real world, motivations, whether actual or perceived, are embedded in many process agreements. These motivations are clear for buyers and sellers whose interests are obviously different. The motivations for the appraisers are less clear. Appraisers are supposed to be independent of the parties. Nevertheless, based on our experience, it is rare for the appraiser retained to represent a seller to reach a valuation conclusion that is lower than that reached by the appraiser for the buyer. This does not at all imply that both appraisers are biased. Consider the following possibilities:

  • Valuation reflects both art and science and is the result of the exercise of judgment. It seems that many buy-sell agreements call for two appraisal conclusions to be within 10% of each other for the two to be averaged. Given the potential for differences in judgments, a range of 10% may be too small. In other words, the process may create the appearance of bias by creating the expectation that two appraisers will reach conclusions so close to each other.
  • The buy-sell agreement may be unclear as to the engagement definition. In such cases, two independent appraisers who interpret the agreement differently from a valuation perspective may reach conclusions that are widely disparate.

Legal counsel for each side desires to protect the interests their clients. As such, in the context of buy-sell agreements, the thinking may occur as follows:

“If my client is the seller, we need to be able to select ‘our’ appraiser, because the company will select its appraiser. Since I am concerned that the company will try to influence its appraiser on the downside, I want to be able to try to influence our appraiser on the upside. Since we are selling and they are buying, this is only natural.”

For purposes of this discussion, if the two appraisals are not sufficiently close together, they can be viewed as advocating the positions of the seller and buyer, respectively. All the parties and their legal counsel may begin to think:

“What is needed now is a ‘truly’ independent appraiser to finalize the process.”

Many process agreements call for the two appraisers to select a third appraiser who is mutually acceptable to them because:

“Surely, ‘our’ appraiser and ‘their’ appraiser, working together, can select a truly independent appraiser to break the log jam since neither side has been successful in influencing the outcome of the process. But, now that we have a third appraiser, what should his or her role be?”

The role of the third appraiser will be determined by the agreement reached by the parties. Consider the following:

  • Chances are, it is not a good idea for the third appraiser’s conclusion to be averaged with the other two since the first two conclusions create a broader specified range than the range giving rise to the third appraisal. Averaging could provide too much influence to an outlier conclusion.
  • Often, the third appraiser’s conclusion will be averaged with that of the conclusion closest to his own. Since the first two appraisers often know this on the front end, they should be motivated to provide independent conclusions, since no one desires to have the outlier (ignored) conclusion. (See “Two and a Tie-Breaker in Chapter 11.)
  • On the other hand, wouldn’t the process be more independent if the third appraiser had to select, in his opinion, the more reasonable of the first two conclusions? Surely, that would tend to influence the first two appraisers to reach more similar conclusions. It would be embarrassing to have provided the conclusion that was not accepted. (See “Two and a Back-Breaker” in Chapter 11.)
  • Still further, the first two appraisers would be under pressure if the third appraiser were to provide the defining conclusion. As discussed previously, some processes provide for the selection of the first two appraisers whose sole function is to mutually agree on the third appraiser, whose conclusion will be binding. Then all the pressure falls on the third appraiser. (See “Two and a Determiner” in Chapter 11.)

We speak here from personal experience. Professionals at Mercer Capital have been the first, second, and third appraisers in numerous buy-sell agreement processes. Clients sometimes do attempt to influence the appraisers, either in blatant or subtle fashion. This is to be expected and is not nefarious. Clients are naturally influenced by their desire for a conclusion favorable to them.3 The purpose of process buy-sell agreements, however, regardless of their limitations, is to reach reasonable conclusions.


Multiple appraiser buy-sell agreements have advantages.

  • They provide a defined structure or process for determining the price at which future transactions will occur.
  • All parties to the agreements know, at least generally, what the process will entail.
  • Multiple appraiser agreements are fairly common and generally understood by attorneys. Many believe that process agreements are better than fixed price or formula agreements, particularly for substantial companies.
  • Parties to such agreements may think that they are protected by the process since they will get to select “their” appraiser. This is an illusory benefit.


There are several disadvantages to multiple appraiser buy-sell agreements:

  • The price is not determined now. The actual value, or price, is left to be addressed at a future time, i.e., upon the occurrence of a trigger event. No one knows, until the end of an appraisal process, what the outcome will be.
  • There is potential for dissatisfaction with the process, the result, or both, for all parties. Multiple appraiser process agreements are designed with the best of intentions, but as we have seen, they have a number of potential flaws. At best, they are time-consuming and expensive. At worst, they are fraught with potential for discord, disruption, and devastating emotional issues for one or all parties.
  • There is danger of advocacy with multiple appraiser agreements. Even if there is no advocacy on the part of the appraisers, the presumption of advocacy may taint the process from the viewpoint of one or more participants.
  • There is considerable uncertainty regarding the process. All parties to a multiple appraiser agreement experience uncertainty about how the process will work, even if they have seen another such process in the past. In our experience, the process, as it actually operates, is different in virtually every case, even with similar agreements. This is true because the parties, including the seller, company management and its directorate, and the appraisers are all different.
  • There is considerable uncertainty as to the final price. The price is not determined until the end of the process. As a result, there is great and ongoing uncertainty regarding the price at which such future transactions will occur. First, before a trigger event occurs, no one has any idea what the price would be in the event that one did occur. Second, following a trigger event, there can be great uncertainty regarding the ultimate price for many, many months.
  • Process problems are not identified until the process is invoked. We noted in Chapter 10 that five defining elements are necessary to determine the price (value) at which shares are purchased pursuant to process agreements. Problems with agreements, such as a failure to identify the standard of value or the level of value, or the failure to define the qualifications of appraisers eligible to provide opinions or the appraisal standards they are to follow, are deferred until the occurrence of a trigger event. At this time, the interests of the parties are financially adverse and problems tend to be magnified. Based on our experience, the failure of multiple appraiser agreements to “pre-test” the process can be the most significant disadvantage on this list.
  • Multiple appraiser agreements can be expensive. The cost of appraisals prepared in contentious, potentially litigious situations tends to be considerably higher than for appraisals conducted in the normal course of business.
  • Multiple appraiser agreements are time-consuming. The typical appraisal process takes at least 60 to 90 days after appraisers are retained. The search for qualified appraisers can itself take considerable time. If a third appraiser is required, there will be additional time for his or her selection as well as for the preparation of the third appraisal. It is not unusual for multiple appraiser processes to drag on for six months to a year or more – perhaps much more.
  • Multiple appraiser agreements are distracting for management. The appraisal process for a private company is intrusive. Appraisers require that substantial information be developed. They also visit with management, both in person and on the telephone, as part of the appraisal procedures. We worked with the CEO of a sizeable private company to determine the price for the purchase of a 50% interest of his family business. The selling shareholder hired another, very qualified business appraiser and we both provided appraisals, with the intention of negotiating a settlement rather than invoking the burdensome, formal procedures of the buy-sell agreement. Our appraisals were about 10% apart and the parties agreed to average them. During the nearly three months that this “less burdensome” process was underway, the CEO (and his CFO and his COO) could scarcely think about anything else.
  • Multiple appraiser agreements are potentially devastating for shareholders. If the seller is the estate of a former shareholder, there is not only uncertainty regarding the value of the stock, but family members are involved in a valuation dispute (yes, that’s pretty much what it is) with the friends and associates of their deceased loved one. Combine these issues with the fact that some agreements require that selling shareholders pay for their share (side) of the appraisal process and there is even more cause for distress.4

Concluding Observations

Based on our experience, multiple appraiser process agreements seem to be the norm for substantial private companies and in joint venture agreements among corporate venture partners. The standard forms or templates found for process agreements at many law firms include variations of multiple appraiser processes similar to those described previously.

As business appraisers, we participate in multiple appraiser buy-sell agreement processes with some frequency. Because of the reputation of our senior professionals and our firm, we are called into valuation processes around the country. Chris Mercer has been the appraiser working on behalf of selling shareholders and companies, and has been the third appraiser selected by the other two on other occasions. As the third appraiser, he has been required to provide opinions where the process called for the averaging of my conclusion with the other two as well as averaging with the conclusion nearest mine. He has also been asked to pick the better appraisal, in his opinion, given the definition of value in agreements. He has also been the third appraiser who provided the only appraisal. Others at Mercer Capital have also performed similar roles.

This experience is mentioned to emphasize that the disadvantages of multiple appraiser appraisal processes outlined here are quite real. We have seen or experienced first hand every disadvantage in the list above. We hope to provide alternatives with more advantages and fewer disadvantages based on our collective experience at Mercer Capital.


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