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Mediation-Valuation Gives Parties Chance to Settle
    Parties ”work-through” Valuation to Reach Compromise

Many attorneys call to ask for a “ball-park number” on the value of a small business or professional practice. After explaining that professional standards do not permit appraisers to give “ball-park” estimates of value, we can often offer an alternative to complex and expensive full-blown appraisals. Where the parties are emotionally and financially ready to settle the dispute, the trained and credentialed business appraiser can often offer a combination of mediation, teaching, and facilitated discussion that can lead to a workable solution.

Mediation-Valuation is Cost Effective. We call this process mediation-valuation. There are several useful models. One model involves a day-long program that can be effective and inexpensive ($3,000 to $4,000) The appraiser-mediator never discloses an opinion of value to the parties. His job is to explain to the parties and counsel how the various aspects of the business – its financial condition, the value of its assets, its future prospects, etc. – all factor into how much a prospective purchaser would pay for the business. When explained in a neutral and non-threatening way by a knowledgeable and effective facilitator-appraiser, the parties buy into the result because they arrive at the value number themselves.

Day-long Session Gets Results Fast. In one day-long controlled session, the participants receive a tutorial on business valuation, present their own ideas of value and are given constructive criticism on them, complete a revealing break-out assignment, and examine sales of comparable companies. In private caucus with the appraiser-mediator, they are individually probed for real underlying issues and are made intimately aware of their options if no value is agreed to. Finally they are encouraged to retain control of the outcome of what may be the most important financial decision of their lives and to avoid turning the decision over to a third party. When this process works, the outcome is effective compromise on their agreed value.

Advantage to Counsel. Counsel is often skeptical in the beginning, but we can provide peer references who have been a part of a mediation-valuation, some of whom were initially reluctant to use this tool. The most frequent question from counsel the day after a mediation-valuation session is “Where did the number come from?” This usually suggests that the parties have achieved a successful result, because the final agreed number wasn’t perceived as either party’s number, rather it was truly the result of compromise.

Here’s How it Works. Here are the key features of a method we know works well. First, we conduct initial interviews (often by phone) separately with each party and counsel. Next, we coordinate schedules for one available full-day, allowing time for production of materials. We then prepare the engagement letter and materials request, assigning production dates and clear responsibility, and collect a nonrefundable fee. During each hour of the session, the appraiser-mediator must focus on particular activities or issues.

First Hour Focus on Neutrality. In the first hour or so, the focus is generally on three activities:

•  Establishing our neutrality and independence: getting everyone comfortable.
•  Reviewing ground-rules on decorum and completing the process.
•  Acknowledging that to maintain objectivity and avoid conflicts of interest, we will not    accept an engagement to appraise the business if the session fails to result in an    agreement on the value of the community-owned business.

During the second hour we usually present a basic tutorial on business valuation, covering the primary approaches to business appraisal. Next, we facilitate a discussion about the business, its earnings history, projections and prospects for the future, owner compensation and perks, etc. When this is done, each side makes a short presentation of its idea of fair market value, which is followed by questions and criticism from the mediator and the other side.

Working Lunch. Participants receive lunch-hour assignments, which vary according to circumstances. For a business, there is a “shoot-out” in which each side picks a number at which they would buy or sell. For a professional practice, the parties are told, “Pick your real peer’s earnings if you can” from compensation studies.

Getting to Conciliation. Compromise usually comes into the picture during hours five and six and when debriefing of the lunch assignments begins. The debriefing is followed by a review of the balance sheet and calculation of adjustments for an orderly liquidation as a floor value. In these hours, we explain how the expected rate of return is directly proportional to the risk of receiving that return. Using the T-bill rate, the S&P 500, and company-specific indicia of the subject’s risk, together we very methodically develop a discount rate and capitalization rate specifically applicable to the subject business.

Excess Earnings Aren’t “Excess”. If a small-business is being valued, we sometimes avoid using the excess-earnings method, a method designed only to measure the value of goodwill, explaining why that method may not work very well. If a professional practice is being valued and the participants insist on considering an excess-earnings method calculation, we show that it requires a careful analysis of the professional’s work-hours and responsibilities because the true “peer” will very likely not be “Mr. Average.”

                             Next we normalize earnings, measure the stability, examine pro forma statements, and apply discount or capitalization rates where their remaining options and understand that we are unavailable to appraise the subject entity in any capacity except as a stipulated joint expert.The concept of using the appraiser’s skills as a mediator and facilitator can be an effective and appropriate. Then we consider comparable sales of similar businesses (where that information is available), using “determining a selling price for your residence” as a metaphor, discussing and either distinguishing and eliminating comparables or accepting a suitable number of comps and then applying a price/revenue or price/earnings ratio to obtain a measure of value for the subject company. Assuming there are good comparables available, this easy to understand market method usually results in serious compromise (finally) and we call for a break for the parties to consider this method. This sets the stage for one-on-one caucuses.

Individual Caucus Sessions. Hours seven and eight are devoted to caucuses in separate rooms. We meet separately with each party to discuss each party’s strong points and weak points. We explore for the “real underlying issue” that is blocking compromise. Usually some obscure issue, frequently involving a third person, keeps parties from compromise in dissolution matters.

Fish or Cut Bait Caucus. During the caucus, we encourage the parties to identify their options should the process fail (for example, the cost of two appraisals, the cost of a trial, and the prospect that a judge may decide their fate). We try not to leave the caucus room before obtaining a compromise of some kind, even if small. Finally, we bring the parties back together when an agreement is reached or when fifteen minutes are left, whichever occurs sooner.

Agreement Comes at the End. Most agreements are reached in the last fifteen minutes. If counsel is not present or the parties are not represented, we prepare a simple bullet-point memo that includes very specifically what was valued and what issues, if any, were not settled; the agreed value, terms and signature lines for the parties. If they are represented, one of the lawyers prepares the stipulation memorandum and in either event the memo is executed by both parties. If there is no agreement at this point, we make certain the parties fully appreciate the consequences of cost-efficient way to bring parties to agreement on the value of community-held businesses and professional practices.

Is This the Time to Sell a Business?
Intermediary is Key to Preparing Business for Sale

Buying or selling a business in today’s environment is like rolling dice on a moving table - it’s an uneven proposition at best. Both buyers and sellers are uncertain about the values of small and closely-held businesses and wonder whether they are likely to get value for their dollar. There is broad feeling afoot that the volatility in U. S. equity and capital markets during the past several years has caused major shifts in shareholder value for both public and privately held companies. It’s simple enough for shareholders of publicly traded shares to test this by reading the Wall Street Journal.

It Depends! The answer to the question “Is this a good time to buy or sell a business?” is, “It depends.” Both buyers and sellers should be aware of the prevailing financial climate. Interest rates, driven downward by falling market prices and economic uncertainty meant that buyers have to put more equity into acquisitions, making it harder for sellers to find buyers with adequate capital to purchase their businesses.

Consolidation Alters Market. Another factor that plays a role in timing your sale is consolidation. Smaller businesses are often targets for larger competitors who want to expand or diversify their markets and achieve economies of scale in their overhead. In a climate where there have been many entrants and demand for products or services is falling or remaining constant, many companies cannot continue to expand in their own market areas and must either buy or die. Industry conditions and the effects of global marketing can also affect timing for sales or acquisition.

Sellers should examine their motives for selling. The seller must also carefully consider his motivation for selling. Many business-owners are selling to cash-out after a purchasers, and will spend as much time as needed to understand your business or the long career in their businesses. Preparing a business for sale, and positioning it so that it’s presented to prospective purchaser at peak-value can take time. Locating investors and bringing good values to long-cycle markets can consume many months. In some cases sellers have not allowed themselves enough time to market their businesses adequately. The time to start is now!

Intermediaries Know How to Present Your Business for Sale. No matter what the economic climate though, one thing is certain: the buyer and seller will both need professional assistance to make sure their decision-making is sound. Accounting advice may be necessary to ensure that the financial statements are accurate and fairly depict the condition and performance of the firm, and to identify important tax issues that can make-or-break a deal. Legal counsel will certainly be required to ensure that no laws are violated and that any agreements between the parties protect the rights of all involved.

Business Intermediary is Key. But just as important, it will be necessary to retain a top-notch business intermediary. This is the guy we used to call a broker. These days selling a business is a lot more involved than just putting a classified ad in the newspaper.

The intermediary will be your counselor and marketer if your are the seller. If you are the buyer he will be your own personal corporate acquisition department. Because he is experienced and knowledgeable he will know just how to highlight the best features of your business for a prospective purchaser, and how to negotiate the best deal with a seller.

All good intermediaries are experts at preparing the “book” or offering memorandum that describes your business to prospective business you are seeking to purchase.

Good Business Intermediaries Can Attract the Right Investors

Institutional Capital can help owners create significant value that might not have been achieved otherwise. Many intermediaries have access to many investor groups. This allows them to assess the best fit for your company. Getting the best deal for your business means putting your company’s best foot forward with prospective purchasers. Usually the intermediary develops the offering memorandum, which becomes the primary marketing tool for your business.

A key step in doing this is in selecting the right people to assist you with the preparation of a high-quality offering memorandum that highlights the strong points of your business. An experienced and capable intermediary can help you prepare your documentation and contact investors best suited to your company’s circumstances. The experienced intermediary should be able to discuss his track record of sales, explain how he will gather information about your company, describe in his own terms the strength of your company, and list the contacts he will use to secure your purchaser.

Marketability Misconceptions

Marketability = Liquidity. The notion of a discount to value based on the marketability of the subject property has been around for a long time, and is based in fundamental proposition that the market craves liquidity and loathes the absence of it. All else equal, a liquid (marketable, as if freely traded) investment should be worth more than an illiquid (less marketable, not freely traded) one. Actual performance of the market clearly demonstrates this phenomenon.

Marketability = Risk. The concept of a marketability discount seems to suggest the value of the subject business should be less because no one would want to buy it. The managing spouse often protests that the business should have a marketability discount because it’s not making money. But technically, this is incorrect: the desirability of the subject business as an investment should be addressed in the required rate of return (i.e. the capitalization rate or the discount rate). Less desirable businesses are riskier investments, so investors would require a higher rate of return on the expected income stream, irrespective of the size or velocity of the marketplace.

Discount Always Relative. For the business appraiser, marketability discounts, (more properly, adjustments for lack of liquidity or for difference of marketability) are critical to the accuracy of the valuation result. But the key thing to remember is that the marketability discounts are always relative to some reference point of value. For example, if the appraiser relies on transactions of public stock (a common benchmark for liquidity) as a source for the development of the discount rate, then the resulting value of the subject business is its value as if were as liquid as publicly traded stocks (which it is not). Without an adjustment to match the marketability (liquidity) of the subject business to the publicly traded stocks that were used as the basis for the discount rate, the value of the subject business may be significantly over-stated.

Marketability Discount is Internal. In this sense, the marketability discount may be said to be internal to the methodology selected by the appraiser, and not closely related to the characteristics of the subject business except insofar as it is less liquid (i.e. would take longer to convert to cash than publicly traded stocks). In the conventional sense, the marketability adjustment only arises because the appraiser uses the rate of return obtained by investors in publicly traded stocks as the source for the benchmark rate of return in his discount-rate development. Were he to use a rate of return obtained by investors in privately-held entities - for example buyers/holders of shares in private corporations - as the benchmark rate of return, no such marketability adjustment would be required because the liquidity of the source for the benchmark rate is the same as the liquidity of the subject ownership interest. This is a watershed change in thinking (though not a new concept by any means) for many lay-thinkers.

Measuring the Discount. Once the decision has been made to rely on trades of publicly traded stocks as the source for the benchmark rate of return, the appraiser must next take steps to measure the extent of discount from the “as if freely traded” value that results form the application of the benchmark-based discount rate. There are a couple of good ways to measure the size of the discount to apply, and we’ll address these in a future issue

More Marketability Misconceptions

Once the appraiser decides that an adjustment for lack of liquidity/adjustment for difference in degree of marketability (the marketability discount) is necessary, the next step is to estimate the size of the discount. Usually these discounts are expressed as a percentage taken away from the “as if freely traded” value of the enterprise, so a 25% marketability discount indicates the closely held subject interest is worth 75% of its “as if freely traded” value.

Two Common Methods. There are two commonly applied techniques for estimating the size of the marketability discount: 1) benchmarking, and 2) a Quantitative Marketability Discounting Method (QMDM). Both are widely used by appraisers, and both have their advocates and critics. Neither is perfect.

Benchmarking. The principle behind the benchmarking method is to study the nature and extent of discounts observed in the real-world and apply this observed benchmark data to the subject by analogy. Most of the real-world data on marketability discounts consists of research studies that review the price paid for so-called restricted stock, i.e., stock that cannot be sold for a period of time due to SEC regulations or agreement with the issuer. A number of researchers have conducted these studies over the years, and there is a current series of studies available to the appraiser.

These studies might indicate, for example, an average in 2000, shares of restricted stock sold for 65% of the freely trading shares in the same company, on a certain date. Other studies look at the price paid in a private transaction, and the price paid shortly after the same stock was registered and sold in an Initial Public Offering (IPO), this difference imputed to reflect the increase in value attributable to the change in liquidity. Once these figures have been observed, the appraiser applies these benchmarks, sometimes with qualitative or subjective adjustment, to the subject shares.

QMDM. The QMDM is a theoretical method that requires the appraiser to estimate the period of time between the date of valuation and the time the subject stock would likely be sold, and with this information, calculate the present value of the stock. The discount for the amount of time between the date of valuation and the likely sale date is said to reflect the cost of illiquidity relative to immediately liquid shares.

Neither Method is Perfect. Both of these methods have some degree of difficulty. The benchmarking method relies on an analogy that may apply better in some circumstances than others. The QMDM requires the appraiser to know when in the future the owner of the closely held shares will sell them, and how much he will sell them for at some distant time in the future. It’s the appraiser's job to select the better method for the particular assignment, and to follow the most objective procedure for applying it to the closely-held subject property.

What’s Up with Revenue Ruling 59-60?

Revenue Ruling 59-60 is the primary ruling providing guidance f or the valuation of closely held common equity interests. When issued in 1959, the ruling specifically referred to valuing “… the stock of closely held corporations where market quotations are not available.”

In 1968 the following paragraph from Revenue Ruling 68-609 expanded the scope of Revenue Ruling 59-60: “The general approach, methods, and factors, outlined in Revenue Ruling 59-60, as modified, are equally applicable to valuation of corporate stocks for income and other tax purposes as well as for estate and gift tax purposes. They apply also to problems involving the determination of the fair market value of business interests of any type, including partnerships and proprietorships, and of intangible assets for all tax purposes.”

It is expected in the valuation community that the original text of Rev. Rul. 59-60 will be revised by the Service in the near future, though few expect major changes.

  In re: Marriage of Hewitson - [142 Cal.App.3d 874, 191 Cal.Rptr. 392 (1983)]
    In valuing closely-held stock appraisers should consider each of the eight factors set     forth in Revenue Ruling 59-60.

This 1983 case asking the Second District Court of Appeal to address the issue of determining the value of closely–held stock that is part of the marital estate set forth several seminal rules, not the least of which is that the trial court may rely on “investment value” rather than “market value” in determining the value of the marital estate pursuant to then Civil Code §4800, though neither of these terms is clearly defined.

The Court also decried the use of price/earnings ratios from publicly traded stocks as the sole indicator of value for closely held shares that are part of the marital estate, finding that such a method is “....unreliable … to determine the value of close corporation shares …[because] closely held corporations possess characteristics which make them inherently different from publicly held corporations, with the primary difference being the lack of marketability” (142 Cal.App.3d 886, citing In re Marriage of Lotz, 120 Cal.App.3d at 384).

Here, the Court was presented with a trial court decision embracing the $9 million value for the community-owned corporate stock found by wife’s expert, who relied chiefly on the price/earnings ratios of companies that had been acquired by other corporations in exchange for stock in the acquirer, rather than price/earnings ratios from stocks that are listed on a stock exchange or over-the-counter.

Consideration of Rev. Ruling 59-60. Our discussion here, though, is focused on another holding of the Court, that “… the [valuation] of infrequently sold, unlisted, closely held stock is a difficult legal problem. Most of the cases illustrate [that] there is no one applicable formula that may be properly applied to the myriad factual situations calling for the valuation of closely held stock. It is therefore, incumbent upon a court faced with such a problem to review each factor that might have a bearing upon the worth of the corporation and hence upon the value of the shares. Unless there is some statutory or decisional proscription on their use, the factors listed in Revenue Ruling 59-60 should be consulted and used to evaluate closely held stock.” (supra. at page 888).

Current business appraisal literature embraces this notion, little of which existed at the time of this decision, and most appraisers would agree that the 8 factors set forth in Revenue Ruling 59-60 are the fundamental considerations in appraising stock in closely-held entities. These factors are listed in every appraisal textbook and on the lips of every business appraiser.

The Eight Factors. The eight factors given in Revenue Ruling 59-60 1 are:

(a) The nature of the business and the history of the enterprise from its inception;
(b) The economic outlook in general and the condition of the specific industry in particular;
(c) The book value of the stock and the financial condition of the business;
(d) The earning capacity of the company;
(e) The dividend-paying capacity;
(f) Whether or not the enterprise has goodwill or other intangible value;
(g) Sales of stock and the size of the block of stock to be valued; and
(h) The market price of stock of similar corporations engaged in the same or similar line of        business having their stock actively traded in a free and open market, either on an        exchange or over-the-counter.

So in-grained in the appraisal profession are these eight factors, that many business appraisers organize their written reports under these eight headings and cross reference each of their considerations to the list of factors.

In 1983, when Hewitson was published, the business appraisal profession was in its infancy. Today, nearly 20 years later, the literature is well developed, and much has been written about the tenets of Revenue Ruling 59-60. Numerous texts fully discuss the implications of each of the eight factors in the valuation of interests in closely-held companies.

The use of publicly traded stock by analogy as a proxy for the value of stock in closely-held corporations (or other business entities, for that matter) is a widely accepted technique today, notwithstanding the holding of the Hewitson Court.

The Court confuses the matter further by misunderstanding the terms “market value:

Fair Market Value. Court seemed to be looking for a valuation method that generated an estimate of the Fair Market Value of the closely-held shares, though it never clearly indicated this. At 142 Cal.App.3d 882 the Court attempts to identify methods that result in the market value of the shares. It cites methods that rely on comparisons between the subject shares and publicly traded shares. These methods are known today as Guideline Public Company Methods, and estimate the value of the closely-held shares by multiplying the price/earnings ratio of publicly traded shares in similar companies by the earnings of the subject company.

As we related in our previous issue, this 1983 case asking the Second District Court of Appeal to address the issue of valuing the value of closely–held stock that is part of the marital estate set forth several seminal rules, not the least of which is that the trial court may rely on “investment value” rather than “market value” in determining the value of the marital estate pursuant to then Civil Code §4800, though neither of these terms is clearly defined.

Here, the Court was presented with a trial court decision embracing the $9 million value for the community-owned corporate stock found by wife’s expert, who relied chiefly on the price/earnings ratios of companies that had been acquired by other corporations in exchange for stock in the acquirer, rather than price/earnings ratios from stocks that are listed on a stock exchange or over-the-counter.

The Court also decried the use of price/earnings ratios from publicly traded stocks as the sole indicator of value for closely held shares that are part of the marital estate, finding that such a method is “....unreliable … to determine the value of close corporation shares …[because] closely held corporations possess characteristics which make them inherently different from publicly held corporations, with the primary difference being the lack of marketability” (142 Cal.App.3d 886, citing In re Marriage of Lotz, 120 Cal.App.3d at 384).

Investment Value. Citing a bad holding in Estate of Rowell (132 Cal.App.2d 421 [1955]) the Hewitson Court carefully distinguished between the investment value of shares in a closely-held company and market value, though it did not so carefully identify the reasons why this difference (if indeed it actually exists) was important to them.

The Court recited three approaches to value, 1) the capitalization of earnings approach, 2) the dividend-paying capacity, and 3) the book value or net asset approach, and stated unequivocally that the application of these methods results in the “investment value” of the shares in the closely-held company: “The application of these approaches… will determine the investment value of the closely-held shares, not their market value.” It’s unclear whether the Court believed that “market value” and “fair market value” mean the same thing.

Confusion Reigns. To say that the Hewitson court was confused is understatement. Where the assumed standard of value is fair market value - which it usually is in family law matters - all of the methods cited by the Court normally result in an estimate of Fair Market Value of the shares. The notion of investment value is unrelated to the issues before the Court in this case (see sidebar below). As the Court acknowledged, “...the determination of the value of infrequently sold, unlisted closely held stock is a difficult legal problem.” Perhaps it’s a problem best left to qualified appraisers.

Selecting a Business Appraisal Firm
Bigger isn’t always better

While professional appraisal credentials in real estate appraisal have been around for decades, professional designation in Businesses Appraisal is a more recent development.
Selecting a business appraiser for litigation, whether it’s a family law matter, estate planning, partnership dispute, failed transaction, or Corp.

Code §2000 case always involves making decisions and tradeoffs. Often this centers around choosing between the local business appraiser or the large national firm from outside the area. This isn’t usually a simple decision, but if the matter is analyzed, the decision should often fall on the side of the smaller, local firm, in order to achieve cost-effectiveness and realize the advantage of access to professionals and the hometown expert’s credibility in front of the local Court.

Size matters. The size of the firm does matter, but less than might ordinarily be the case for other consulting type arrangements. In business appraisal, it’s important to be sure that the local appraiser has the same access to research resources that a larger national appraisal firm would have.

Today, virtually all of the research resources used by business appraisers are readily available online, and every valuation professional office has exactly the same references and resources at its disposal as the 20-professional national appraisal firm. And, it’s important be sure that the smaller firm has the manpower to do the job within the planned schedule. Often, the smaller local firm is able to respond more quickly and efficiently to demands for quick turnarounds. Our office can usually produce an appraisal within three weeks of receiving the information requested from the subject Company.

It’s the individual. In business valuation, the appraisal is always performed by an individual. This is an important fact, with testimony isn’t likely to be required. In particular, the most cost-effective way to accomplish the appraisal is to retain the smaller especially important implications for litigation. Only individuals, not firms, can be awarded professional credentials.

Further, all of the professional standards to which appraisers conform require that each appraisal report be signed by the appraiser responsible for it. In larger firms, many individuals can sometimes get involved in an appraisal in a support role. It’s happened many times that each of these individuals has to be deposed and examined in order for the appraisal to be admitted. At ABA, all valuation and forensic work is performed by the individual signing the report.

This is an advantage in depositions and trials as the individual performing the work is the same person who is being deposed or providing the testimony. Ultimately, it is the credibility of the individual who signs the appraisal report that carries the day.

Cost is Always a Consideration. Cost-effectiveness should always be a consideration in selecting an appraisal firm, not just for expert testimony, but any kind of appraisal. Appraisal fees vary widely from firm to firm. For example, two appraisal professionals, both with the exact same senior credentials may charge different hourly rates.

The larger firm, with larger overhead, might have to charge $450 to $750 per hour for the professional. A smaller firm, with lower overhead might charge less 50%-75% of that amount. This is a real example, not a hypothetical worst-case. Our hourly rates are often 60-75% of the rates charged by large-overhead firms. So long as the individual signing the appraisal is qualified, the work-product from the larger more expensive firm will be no better than the one from the smaller firm.

The Same Things Apply to Non-litigation Assignments. All of these same considerations in the selection of an appraiser-expert apply to assignments where expert professional firm that can give counsel or the estate planning professional the most personalized service for his clients.

Forensic Accounting in Divorce Matters.

Divorce is unique in that the motivations to be less than honest are often more complicated than the typical financial crime motivated purely by financial gain. In a divorce, a spouse may have the desire to “cheat” his or her spouse out of their “fair share” of the marital property or humiliate, emotionally overwhelm or otherwise damage their spouse.

The most common cheating by divorcing spouses is to understate assets and income in a closely held business. An owner has the ability to manipulate situations in ways limited only by their imagination. However, there are recurring patterns of activity in the understatement of income and assets. They involve personal use of business assets (automobile, club dues, payment of personal living expenses by the business, petty cash abuse, inventory abuse) self-dealing with related parties (relatives of business partners), sudden decrease in revenues, revenue deferment, new or hidden bank accounts, unnecessary bad debt reserves or write-offs and unreported cash transactions.

In order to successfully uncover the actions of a dishonest spouse requires a level of tenacity and “thick skin”, not only by the forensic accountant, but also by the entire litigation team.

When a divorce requires a business valuation it is a good idea to engage a practitioner who is not only skilled in business valuation, but forensic accounting as well. The hiding of income and assets not only impacts the amount of alimony and child support ultimately paid to the “out spouse” but may also have a material impact on the value of the business. Though such engagements are distinct and separate an expert with experience in both business valuation and forensic accounting is the most cost effective method of dealing with a business valuation and related fraudulent activity.

In the normal course of the preparation of a business valuation ABA has uncovered numerous instances of cheating schemes, even when the “out spouse” had no idea “something was wrong”. A business valuation professional without forensic expertise might not have discovered the systematic looting of the company by the “in spouse.

Standard of Value is Everything!
Standard of Value Represents the Key Assumption of the Appraisal

The Standard of Value (archaically called the Definition of Value) assumed by the appraiser is the fundamental assumption under which the valuation proceeds. It represents the most basic instruction from the client to the appraiser, and tailors the valuation analysis to the requirements of the users of the appraisal. There are several typical standards of value commonly used by business appraisers: Fair Market Value, Fair Value, Investment Value, and a few specialized standards of value.

Fair Market Value. This is the typical “willing buyer-willing seller” kind of value, expressed as cash or cash equivalent. It assumes that both the buyer and seller are knowledgeable and are in possession of all pertinent facts, are risk averse and possess competency in the operation of the business. This value represents a composite of all financial buyers, but excludes strategic buyers (buyers who will obtain synergy value by buying the subject property). This standard of value is typical in most kinds of litigation, and illustrates the price at which the business would transact in an open market.

Fair Value. There are many notions of Fair Value, but the most common standard is the same as Fair Market Value but the subject interest is valued as though it were a controlling interest, i.e. without taking a minority discount. This assumption is usually present in statutory appraisals pursuant to shareholder oppression litigation. (i.e. Corp Code §2000.

Investment Value. Investment Value is nothing more than the value of the subject interest to a particular named person or entity, and usually includes the value of the business the buyer will obtain through synergies with his own existing business entities.

Variations on the Theme. There are many variations on the theme, of course. One such variation is the legal requirement that the appraiser not give effect to a buy/sell or partnership agreement where the agreement is construed by law to unfairly penalize the non-owner spouse in the division of community property. Partners might, for example, draft a partnership agreement that makes the partnership interest valueless for purposes of distribution of community property, but the law in that jurisdiction might require that the appraiser to not give voice to that provision and appraise the partnership interest as though the agreement did not exist.

Why is the Date of Valuation Important?

In fact, in our experience, it seldom is. But when there are unusual circumstances, the date of valuation can be as critical as the Standard of Value imposed.

From time to time we see a case where the managing spouse has taken covert or overt steps to adversely affect the value of the community-owned business. The dentist, for example who reduces his case-load voluntarily, or the contractor who delays signing contracts until after the trial to divide the community. Other times, we see the case discussed by the Court in Duncan, where the value of the business increases owing to the efforts of the managing spouse. In these fairly rare circumstances, the value of the company can vary substantially between separation and trial.

As a practical matter, it is a good idea to have your appraisal expert value the company at both dates of valuation, especially where the date of value has not been decided in advance.

In re: Marriage of Duncan
Use of Alternative date of valuation under Family Code §2552(a) proper where professional post-separation efforts result in increase in value of community-owned business.

This 2001 case out of San Diego addressed the question of whether an alternative date of valuation under Family Code §2552(a) requires that the change in value be related entirely to the post-separation efforts of the managing spouse.

The parties were married when they formed a pension investment firm in 1990. The company was managing over $1 billion in assets when the parties separated in 1994. Husband continued to operate the investment business after the date of separation. The trial court did not hear the valuation issues until 1997, by which time the investment portfolio of the company had increased substantially. Husband argued that because the increase in the size of the firm was due to his own post-separation efforts, the business should be valued as of the date of separation instead of the date of trial.

Wife asserted on appeal that the trial court’s use of the alternative date of valuation was improper because the post-separation increase in value was due to factors other than husband’s personal efforts.

In its analysis the appellate court reviewed the state of the law in California regarding the application of the alternative date of valuation provided for in Family Code §2552(a). “Case law has established that good cause generally exists for a professional practice to be valued as of the date of separation.” (Marriage of Kilbourne (1991) 232 Cal.App.3d 1518 [valuation of law practice]; Marriage of Green, (1989) 213 Cal.App.3d 20 [valuation of law practice].)

This exception applies because the value of such businesses “is primarily a reflection of the practitioner’s services and not capital assets… Because the earnings and accumulations following separation are the spouse’s separate property, it follows that the community interest should be valued as of the date of separation - the cutoff date for the acquisition of community assets.” (Marriage of Stevenson (1993) 20 Cal.App.4th 250, 253-254). Further, “[t]he rationale for the general exception is not limited to law practices. It applies with equal logic to other small businesses that rely on the skill and reputation of the [managing spouse].” (Marriage of Stevenson 20 Cal.App.4th at 254 [small general contracting business].) Thus an alternative date of valuation may apply to a business when its value “...devolves largely from the personal skill, industry and guidance of the [managing spouse].” (Ibid.)

Here the community company manifested all of the attributes of a professional practice, including performing a service for a fee, offering specialized knowledge and experience, being licensed and regulated, and having asset that consist mostly of office equipment, accounts receivable, and work-in-progress.

Thus the value of the company derived not from its capital assets, but rather from the professional investment advisory services that husband provides to it. Nothing in Family Code §2552(a), the Court held, requires the trial judge to find that the entire post-separation change in value was due exclusively to the personal efforts of the operating spouse in order to apply an alternative valuation date.

  Why do we take a Minority Discount?
   Value of Minority Interest is Lower Because of Lack of Control

It comes as a surprise to many that a minority interest in a privately held company is worth less than its proportionate share of the company taken as a whole. These people often think that a 15% interest in a company that is worth $1,000,000 should be worth $150,000. This is a sometimes hazardous notion.

Well-trained appraisers and experienced investors know that minority interests (often called non-controlling interests) are worth less—substantially less—than their proportionate share of the value of the company. Controlling shareholders enjoy many benefits that are not available to non-controlling shareholders.

Benefits of Control. Among the benefits reserved for controlling owners are:

•  The ability to appoint or change management;
•  The ability to control the Board of Directors;
•  The ability to set management compensation and perquisites;
•  The ability to liquidate, sell-out, or recapitalize the company;
•  The ability to pay (or not pay) dividends to shareholders;
•  The ability to acquire, lease, or liquidate business assets;
•  The ability to negotiate mergers and acquisitions; and
•  The ability to control the operation and course of the company’s business.

Majority Controls Dividends. From a practical standpoint, the owner of a less-than-controlling interest in the company is at a severe disadvantage compared to the owner of the controlling interest. The controlling shareholder/manager is under no obligation to pay any portion of the profits to other shareholders. Where the controlling shareholder is also the manager or president of the company, he will sometimes set his own compensation so high that no profits are left over to pay to other shareholders as a return on their investment.

Other times controlling shareholder/managers will hire family members and pass on to them as compensation the profits that might otherwise go to non-controlling shareholders. Far from the exception to the rule, this is a common occurrence in many small privately owned companies.

No access to Value of Assets. Many minority shareholders believe that because the assets of the company have value, that the value of their share is protected by the value of the underlying assets. This is seldom the case. Ownership of stock in a company does not grant the shareholder any portion of the ownership of the underlying assets. In the first place, the creditors of the company will always be in line ahead of shareholders if the company is liquidated, and the controlling shareholder can control the liquidation of the assets.

For all of these reasons, it’s well-settled law that a non-controlling interest is in most cases worth less per share than a controlling interest.

Unfortunately there isn’t a book where the extent of the minority discount that should be applied can be looked up by the appraiser. It depends on the nature and extent of the infirmity suffered by the controlling shareholder. This infirmity, the opposite of the advantage enjoyed by the controlling shareholder, depends on such factors as the relative sizes of the blocks held by the controlling shareholder and the non-controlling shareholder; the rights and benefits set forth in the shareholders’ agreement, rights and duties of controlling shareholders set forth in law, and the attitude and historical patterns of the controlling shareholders in paying dividends out to minority shareholders.

Many Appraisers Rely on Benchmarks. In many cases, business appraisers rely on benchmarks for minority discounts derived from control premia paid by acquirers of controlling interest in other companies. The implied minority discount is the inverse of the control premium paid by the acquirer. There are many reasons why this is an imperfect measure of the minority discount, but it is about the best source of observed market data available. According to recent compilations of these control acquisitions, the median implied minority discount is about 30% from the value of the stock (for large companies).

Minority Discount for Smaller Companies May be More. For small companies the discount can be very much greater than this figure because the typical controlling shareholder in a small business has far greater power than management of the size companies typically acquired. Some appraisers believe that non-controlling interests in small privately held companies are entirely worthless.

What’s the Difference Between a Control Premium and a Minority Discount?:

Both the Control Premium and the Minority Discount are really internal calculations used by the appraiser to match the control characteristics of the subject property (i.e. whether or not it comprises a controlling interest) to the source of information from which the value is determined.

For example, if the appraiser is valuing a minority interest in a small business and relies on sales of controlling interests of such businesses - the kind of comparable sales information gotten from business brokers - he will have to adjust for the difference in control power between the subject (that has no control) and the buyers of the comparable companies (who enjoyed complete control).

In this case, he would apply a minority discount or discount for lack of control. Conversely, if he derived his value estimate from non-controlling transactions - such as those observed in the stock market - and he were appraising a controlling interest, he might apply a control premium in respect of this difference.

What is “Fair Value” Anyway?

The definition of value is critical to the correct application of the law, especially in the case of shareholder dissent or minority oppression actions. Fair Value has seldom been defined clearly in statute, and can vary from jurisdiction to jurisdiction.

The revised Model Business Corporation Act defines Fair Value as “The value of the shares just before the effectuation of the corporate action to which the shareholder objects, excluding any appreciation or depreciation in anticipation of the corporate action unless exclusion would be inequitable.

California has not adopted this definition officially. In most applications Corp Code §2000 in interpreted to require the appraisers to apply most of the common elements of the Fair Market Value standard - willing knowledgeable seller, willing knowledgeable buyer - but to value the shares without regard to their minority status. In other words to use the same per share value as a controlling interest would have.

Mart v. Severson - [2002 DJDAR817]
Appraisers should assume reasonable terms in sale of Company as a going-concern in liquidation.

This 2002 case out of the First Appellate District (San Francisco) speaks to the assumptions applied by business appraisers in a Corp. Code §2000 valuation, and clarifies the proper role of the trial Court in setting the price to be paid by the controlling shareholders to the unhappy minority shareholders.

Pursuant to the election by the majority shareholder to have the corporate stock appraised under the provisions of Corp. Code §2000, the panel of three appraisers considered the value of the corporation in a piecemeal liquidation of its assets, but concluded that this method did not apply because the company was a profitable going concern, and more likely to be sold under the scenario of a going concern sold in liquidation. In developing their unanimous opinion of value the appraisers adopted methods that relied on the income stream of the company as the best indicator of its value.

This resulted in a value of $5.6 million, as compared with the value of $1.48 million if the assets were sold piecemeal in liquidation. In applying this going-concern methodology the appraisers relied on the assumption that a willing seller would give the willing buyer a covenant not to compete at the time of the hypothetical sale. The trial Court adopted the lower value on the basis that no such covenant not to compete was in place at the date of valuation so the appraisers’ reliance on it was improper. Minority shareholder appealed hoping that the appellate Court would find the appraisers’ assumptions proper and force the controlling shareholder to pay the higher price for minority shareholders’ stock.

On appeal the Court clearly differentiated between the covenant not to compete that may or may not issue as between the parties to the litigation, and the hypothetical covenant not to compete that a willing seller would freely give to a willing buyer as the result of the negotiation of reasonable terms of the sale. In most appraisals, appraisers usually assume such an agreement will issue since it circumscribes the substance being sold to the buyer: if the seller takes the goodwill with him, the buyer has bought nothing.

The Court held that the appraisers properly applied Corp. Code §2000 by assuming that a hypothetical willing seller would execute a covenant not to compete with the corporation, after the sale; even though the actual parties may not have done so. The Court embraced the notion that the standard of value, here Fair Value, requires the appraisers to contemplate a hypothetical sale scenario; a sale of the entire corporation, in a liquidation setting, on the date of valuation.

This is consistent with California case law: in Abrams, the Court held that appraisers who conducted a Corp. Code §2000 fair value determination acted properly by assuming that the owners of the corporation would have agreed not to compete with the corporation after it was sold as a going concern in liquidation. [Abrams v. Abrams-Rubaloff & Associates (1980) 114 Cal.App.3d 240]. Under the statute the appraisers are not only entitled, but required to consider the manner in which the [hypothetical] parties to such a hypothetical sale are most likely to maximize their return. [Id. at 249]. Thus the question posed by the statute is whether the entire corporation could have been sold as a going-concern in liquidation. The appraisers answered the question by considering hypothetical reasonable buyers and seller in a hypothetical forced-sale environment.

The appellate Court found that the trial Court misinterpreted §2000 in requiring that the appraisers give weight to the fact that the parties might not have granted the covenant not to compete. Interestingly the Court went on to conclude that the statue contains a procedure for establishing a fair value price for the minority shareholders’ stock. However, the statute does not govern or even address covenants not to compete or any other tem of the sale pursuant to which the buying party can buy-out the minority shares. Nor does it authorize the trial court to dictate any of the terms of that sale other than the sale price. Section 2000 doesn't give the trial court authority to require a party to execute a covenant not to compete or to evaluate the validity of such a covenant. The Court held that the trial court should not have gotten involved in negotiations pertaining to that sales term.

ABCs of Appraiser Credentials
Not all Appraisal Designations are Created Equal.

While professional appraisal credentials in real estate appraisal have been around for decades, professional designation in Businesses Appraisal is a more recent phenomenon. It’s been less than thirty years since the Institute of Business Appraisers (IBA) was formed and since the American Society of Appraisers (ASA) officially recognized business valuation as a separate appraisal discipline. Since that time a number of other organizations, likely seeking to capitalize on the emergence of BV as a fee-producing technical specialty and hoping to siphon off some of the fee revenues to the troubled Public Accounting profession, have jumped into the alphabet soup of professional designations.

Credibility Counts. It’s certainly true that not all credentialed appraisers are equally qualified, and in a given case the lesser credentialed appraiser can sometimes do as good a job as the one holding the more senior designation. But in a world of experts, high quality credentials mean high quality credibility, and in every case in every trial, credibility carries the day. Further, it’s often the quality of the credentials that gets the case settled and avoids the costly trial.

CPAs Suddenly Become Appraisers. Most recently into the melee with the ASA and IBA are the National Association of Certified Business Analysts (NACVA) and the American Society of Certified Public Accountants (AICPA), both of which created alphabetic monikers (CVA & ABV) for their members.

Though there is certainly a lot of turf guarding in the industry, it’s fair to say that the two most senior credentials, and the most difficult to obtain are those awarded by the American Society of Appraisers and the Institute of Business Appraisers, Accredited Senior Appraiser (ASA) and Certified Business Appraiser (CBA), respectively. But these guys are rare commodities: only about 400 individuals are credentialed as CBAs, and about 700 as ASAs, so they are not always easy to find.

Experience Requirements Prove-up Skills. Both the American Society of Appraisers and the Institute of Business Appraisers are unique in that they require that designation applicants have a minimum amount of actual hands-on business appraisal experience, and require that applicants submit a sample of their actual work product to a committee of reviewers for approval. Both the ASA and the IBA require each successful applicant must have completed 5 years of full-time practice exclusively in the performance of business appraisals. By contrast, NACVA has no requirement that the applicant have ever performed an actual appraisal for a client, and the AICPA only requires that the applicant have “involvement” in ten business appraisals.

Some Written Exams are Easier. Both of the professional appraisal societies and the other credentialing entities require that applicants pass a written examination, though the rigor of the examination is likely not equivalent among the organizations. The IBA written examination is a four-hour objective and case study test, proctored by the IBA several times throughout the year.

The ASA conducts its proctored examination a little different allowing any applicant who meets all of the requirements to sit for the open group examination, or to take and pass four examinations given at the end of their four main Appraisal Principles courses. The pass rate for these exams has been running about 50%. The AICPA recently developed a written examination for its accountant members - applicants must be CPAs to take the examination - the AICPA doesn’t announce what the pass rate is for its examination. The process used by NACVA is different from the rest: its examination is an open-book take-home, mail-in exam and case study. We’re not aware of any applicant who has failed the NACVA take-home examination.

Summary. In a world where the nature of the work product is so technical, the imprimatur of credibility is the mantle of success. Your clients’ cases are best placed in the hands of the most skilled and credentialed business appraiser available — those recognized as Certified Business Appraiser (CBA) and Accredited Senior Appraiser (ASA). Both the IBA and ASA publish directories of their credentialed members and maintain websites to assist in locating qualified business appraisers. Both Mr. Eggers and Mr. Laversin are credentialed CBA & ASA appraisers. They are two of what is likely less than 100 U.S. appraisers who hold both of these advanced professional designations, as well as CPAs.

“Core Earnings” Measure Alters Landscape
New Measure of Profitability will bring honesty to Corporate Earnings

In late May of 2002 Standard & Poor's published a set of new definitions it will use to evaluate corporate earnings.

At the center of Standard & Poor's effort to return transparency and consistency to corporate reporting is a focus on what it refers to as Core Earnings, or the after-tax earnings generated from a corporation's principal business or businesses. Since Standard & Poor's believes that there is a general understanding of what is included in As Reported Earnings, its definition of Core Earnings begins with As Reported and then makes a series of adjustments.

Included in Standard & Poor's definition of Core Earnings are expenses for employee stock options grant expenses, restructuring charges from on-going operations, write-downs of depreciable or amortizable operating assets, pensions costs and purchased research and development. Excluded from this definition are cash flows generated by impairment of goodwill charges, gains or losses from asset sales, pension gains, unrealized gains or losses from hedging activities, merger and acquisition related fees and litigation settlements.

For too many years CEOs have been more concerned about the price of the shares they hold in the Company, and far too unconcerned about the long-term success of the core business itself. Too many executives have gotten rich in a bull market on money made on mergers and acquisitions, and too few on producing useful products for consumers who need them.

To be sure, there is a place for compensating managing officers with stock in the Company, and stock options can be an important incentive tool. But it is this long-term perspective that will in the end hand the advantage to the Asian businessman who plans and operates in terms of generations, not quarters.

S&P’s move to report the “core earnings” as a measure of the success of the management team in running the business is a giant step toward honesty and integrity in the world of business - both large and small, and will do much to improve the competitive health of future U.S. business. We here applaud it.

What is USPAP?

Following the failure of the savings and loans institutions in the mid-80s, which Congress blamed partly on unethical real estate appraisers, the several real estate appraisal societies formed the Appraisal Foundation for the purpose of self-governance of the appraisal profession. The Foundation promulgated the Uniform Standards of Professional Appraisal Practice (USPAP), which cover not only real estate appraisal, but all appraisal disciplines, as well, setting forth minimum ethical and performance standards for appraisers. Compliance is mandatory for all members of professional societies who are members of the Foundation, and optional for other appraisers. As a member of the American Society of Appraisers, we are bound to comply with all applicable USPAP provisions for every appraisal assignment. Michael J. Eggers is a Certified Instructor and co-chairman of IBA’s Qualification Review committee and has had the opportunity to teach these provisions of USPAP to other Appraisers.

How much Should a Business Appraisal Cost?
Price Driven by Purpose of the Appraisal, Professional Standards, Appraiser Overhead

Like any other professional service, such as legal services, medical care, financial advisory services, or accounting services, the price of appraisal services to the ultimate user should always be one consideration in selecting the professional or professional firm. However, it’s usually not appropriate to shop for the lowest priced vendor, or to use competitive bidding to obtain the lowest price. The heart patient whose life may depend on the skill and judgment of his surgeon, wouldn’t be smart to put his surgery out to bid. Similarly, the client whose financial fortunes may rely on the quality of work or the effectiveness of testimony by his valuation expert should probably not make a decision on hiring an appraiser based primarily on lowest fees.

That said, the relationship between quality of services and fees is not linear: there are factors unrelated to the quality of the services that affect the fees demanded for them. For example, the basic amount of work the appraiser has to perform for an appraisal is driven by the professional standards he must follow in conducting the appraisal. The emergence of the Uniform Standards of Professional Appraisal Practice (USPAP) as the controlling rules for appraisal engagements has increased the amount of work appraisers must do, even for simple appraisal assignments.

The largest single driver of appraisal cost though, is the purpose to which the client desires to put the appraisal result. Appraisals for use as informal pricing guides for sellers or buyers require the least amount of work on the continuum of effort, and appraisals done for use in contentious litigation probably require the most effort. In between these extremes are appraisals for other purposes, such as buy/sell agreements, partnership agreements, estate planning, asset allocation, etc.

Preliminary Analyses Value Studies - $2,000 to $10,000. These kinds of less-than-comprehensive valuation efforts can be well-suited for situations where a client needs a ball-park estimate of value, perhaps as a starting point for sales negotiations, or to achieve a better understanding of the value drivers in his company. Often this type of assignment is begun with a Value Study to identify the value drivers of the subject business entity, and followed-on with consulting over a period of time to prepare the business and the owner for subsequent sale. Where we are involved in negotiation, packaging, or presentation of the business entity there may also be a success fee payable to our firm.

Limited Partnership Appraisals - Value in Real Property Assets Only -Discount Study - $3,000 to $10,000. The typical setting for this kind of appraisal is a Family Partnership formed to protect real property assets from estate taxation. Usually the partnership has no income distributions to the limited partners, and all of the profit is paid to the General Partner. The value of the entity is based on its assets, and the values of the real property assets are provided to us by the real estate appraiser. Our assignment is to estimate the value of small minority limited partnership holdings in the entity, and to assign marketability and minority discounts from the enterprise value, if applicable. These projects typically involve only a summary report.

Comprehensive Appraisal - Summary Report - $10,000- $25,000. This is the most common type of assignment, and calls for the application of a full complement of appraisal procedures. This is the type of engagement suitable for most kinds of litigation, including family law, partnership disputes, shareholder oppression litigation, forced buy-outs, business torts, contract disputes, etc. The chief reason that appraisal engagements for litigation cost more is because the analysis and reporting must be performed to a standard of thoroughness that will allow them to survive rigorous cross-examination by opposing counsel. This takes time and costs money, just as all of the other components of litigation. The appraisal is not the place to cut corners.

All of these pricing guidelines are predicated on the availability of good bookkeeping and accounting records. Forensic accounting is often required in litigation matters the fees are usually billed separately for these services. Generally, the appraiser cannot commence the engagement until there are good financial statements (income statements and balance sheets) available. These need not be uncontested, of course, but where the income of the entity or the values of the assets are in question, the appraiser must be given an instruction as to what assumptions to use in his appraisal.

What is Investment Value Anyway?

The International Glossary of Business Valuation Terms defines Investment Value as “The value to a particular investor based on individual investment requirements or expectations.” The Guide to Business Valuation Glossary adds the phrase “...as distinguished from the concept of market value, which is impersonal and detached.”

The idea of investment value is that it is not based on a hypothetical purchaser who represents a composite of all purchasers for value, but instead on the value to a specified individual with a specified set of investment criteria and especially those with the potential for synergistic value. It arises mostly where the appraiser is asked to estimate the value of a business entity to a potential purchaser who is known and identified at the outset. This might be the value, perhaps, of shares in a target company to its acquirer, where the merger of the acquirer and the target together will result in a combined value greater than the sum of the individual values.

  Mediation-Valuation gives parties opportunity to “work-through” valuation    to reach compromise

Many attorneys call to ask for a “ball-park number” on the value of a small business or professional practice. After explaining that professional standards do not permit appraisers to give “ball-park” estimates of value, we can often offer an alternative to complex and expensive full-blown appraisals. Where the parties are emotionally and financially ready to settle the dispute, the trained and credentialed business appraiser can often offer a combination of mediation, teaching, and facilitated discussion that can lead to a workable solution.

Mediation-Valuation is Cost Effective. We call this process mediation-valuation. There are several useful models. One model involves a day-long program that can be effective and inexpensive ($3,000 to $4,000) The appraiser-mediator never discloses an opinion of value to the parties. His job is to explain to the parties and counsel how the various aspects of the business – its financial condition, the value of its assets, its future prospects, etc. – all factor into how much a prospective purchaser would pay for the business. When explained in a neutral and non-threatening way by a knowledgeable and effective facilitator-appraiser, the parties buy into the result because they arrive at the value number themselves.

Day-long Session Gets Results Fast. In one day-long controlled session, the participants receive a tutorial on business valuation, present their own ideas of value and are given constructive criticism on them, complete a revealing break-out assignment, and examine sales of comparable companies. In private caucus with the appraiser-mediator, they are individually probed for real underlying issues and are made intimately aware of their options if no value is agreed to. Finally they are encouraged to retain control of the outcome of what may be the most important financial decision of their lives and to avoid turning the decision over to a third party. When this process works, the outcome is effective compromise on their agreed value.

Advantage to Counsel. Counsel is often skeptical in the beginning, but we can provide peer references who have been a part of a mediation-valuation, some of whom were initially reluctant to use this tool. The most frequent question from counsel the day after a mediation-valuation session is “Where did the number come from?” This usually suggests that the parties have achieved a successful result, because the final agreed number wasn’t perceived as either party’s number, rather it was truly the result of compromise.

Here’s How it Works. Here are the key features of a method we know works well. First, we conduct initial interviews (often by phone) separately with each party and counsel. Next, we coordinate schedules for one available full-day, allowing time for production of materials. We then prepare the engagement letter and materials request, assigning production dates and clear responsibility, and collect a nonrefundable fee. During each hour of the session, the appraiser-mediator must focus on particular activities or issues.

First Hour Focus on Neutrality. In the first hour or so, the focus is generally on three activities:

•  Establishing our neutrality and independence: getting everyone comfortable.
•  Reviewing ground-rules on decorum and completing the process.
•  Acknowledging that to maintain objectivity and avoid conflicts of interest, we will not    accept an engagement to appraise the business if the session fails to result in an    agreement on the value of the community-owned business.

During the second hour we usually present a basic tutorial on business valuation, covering the primary approaches to business appraisal. Next, we facilitate a discussion about the business, its earnings history, projections and prospects for the future, owner compensation and perks, etc. When this is done, each side makes a short presentation of its idea of fair market value, which is followed by questions and criticism from the mediator and the other side.

Working Lunch. Participants receive lunch-hour assignments, which vary according to