The Six Defining Elements of a Process Buy-Sell Agreement
Process agreements, as discussed in the book Buy-Sell Agreements: Ticking Time Bombs or Reasonable Resolutions?, are buy-sell agreements involving the use of one or more business appraisers in processes specified for determining value. Mercer Capital professionals have been involved in many valuation processes for determining price (valuations) for buy-sell agreements. In fact, a primary impetus for writing the book was our experiences with problem processes.
If appraisers are to determine price, they need a definition of the assignment. Five elements must be defined in order for the appraisers) to provide the type of valuation sought pursuant to the agreement. A sixth element is so important from a business perspective that we include it as an additional defining element.
- Standard of Value
- Level of Value
- The "as of" Date
- Qualifications of Appraisers
- Appraisal Standards
- Funding Mechanisms
Let's begin with the first five defining elements.
- Standard of value. The standard of value is the identification of the type of value being used in a specific engagement. The proper identification of the standard of value is the cornerstone of every valuation. The parties to the agreement may select that standard of value. Will value be based on "fair market value" or "fair value" or some other standard? These words can result in dramatically different interpretations from a valuation perspective. Some agreements simply specify "the value" of the company or interest, which is not adequate to define the standard of value. The likelihood of a successful appraisal process diminishes greatly if the standard of value is not clearly specified.