When RIA owners can’t agree on the appropriate price for a shareholder buyout, we’re often jointly retained to value the departing member’s interest in the business pursuant to a buy-sell agreement.  Whether we’ve been court-appointed or mutually chosen by the parties to do the project, we’ve done enough of these over the years to learn that the process matters as much as the outcome.

As a consequence, we’ve developed some fairly strict procedures for engagements involving buy-sell disputes.  The backstories for most shareholder disputes in the investment management industry have common themes: the long-time partner ends up at odds with the rest of the ownership, usually for economic reasons, and is more or less forced out.  There are usually many negative emotions, mistrust, and even impaired careers on both sides.  The necessity of the buyout is obvious: the ex-partner wants to be paid so they can move on, and the remaining partners don’t want to share the spoils of ownership (distributions) with their ex any longer than necessary.

As the jointly retained appraiser, we’re often in the awkward position of serving as judge and jury on the valuation without the usual protections afforded a judge or jury (like unlimited indemnification or an armed bailiff).  So, like a private detective, we’re left on our own to design and conduct an investigation to reach a reasonable outcome.  If the process is sufficiently robust and fair, the two parties may not like the result, but they’ll have to accept it.  Doing so involves focusing on a few key issues.

Working in a Glass House

There is no substitute for transparency.  We generally require that all information requested by and shared with us be shared with both parties (usually in the same data room).  We also copy all parties on our communications and request that they do the same.  When we conduct interviews with the parties as part of our normal due diligence, we open those meetings to both parties.  Typically, the parties agree not to attend each others’ interviews so that they’ll feel free to speak to us more openly.  This inevitably leads to accusations at some point of our being lied to “in closed-door meetings.” In reality, no one is blind to the parties’ motivations in a buy-sell dispute, and we usually hear some level of hyperbole from both sides.

Separating Fact from Opinion

Like any valuation engagement, we start with an information request to get the basic facts of the situation: financial statements, AUM detail, projections, organization charts, strategic plans, etc.  Then, we interview the parties and (frequently) get very different interpretations of those facts.  It is not unusual for both sides to have very earnest, if diametrically opposed, opinions of why the facts are the way they are.  Squaring those interpretations against what we can discern as the reality of the situation is part of our job.

The Value of Client Review

In a normal valuation matter, we prepare a draft report for client review to ensure we understand key elements of the enterprise’s value.  In the case of a shareholder dispute, this review process is more structured.  We usually have both parties review our work product independently and give a written review that is distributed to us and the opposing party.  Then, we allow the parties to comment (also in writing) on each other’s review.  Our expectation is that knowledge of this cross-review process will dissuade the parties from misconstruing issues in their initial comments on our draft.  That doesn’t always work, but at least we have the benefit of both perspectives before we issue a final report.

Economic Independence

A client in one of these matters told us that he had heard jointly retained appraisers tend to favor the firm over the ex-partner (he was an ex-partner).  I haven’t heard the same thing, but it’s easy to be accused of bias.  One of the ways we guard against this is by structuring the engagement such that it is clear our payment is not contingent on the outcome.  We start the engagement with a retainer that is applied against the final billing and stipulate that bills be paid currently before we release a draft report or a final report.  This assures both parties that we’re not in anyone’s back pocket and have the economic freedom to express the opinion of value we think is appropriate.

No Man Can Serve Two Masters

Suffice it to say, we’ve learned a lot of this the hard way.  It’s no fun to be the punching bag between former partners who no longer want to have anything to do with each other, and business divorces are among the most fractious engagements we find ourselves in.  But it doesn’t help matters for us to offer to make someone else’s problem our problem.  Our work involves sticking to a disciplined process that respects the facts and allows both parties to participate openly.

About Mercer Capital

We are a valuation firm that is organized according to industry specialization.  Our Investment Management Team provides valuation, transaction, litigation, and consulting services to a client base consisting of asset managers, wealth managers, independent trust companies, broker-dealers, PE firms and alternative managers, and related investment consultancies.