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
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
• 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 sometimes 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
Next we normalize earnings, measure the stability, examine
pro forma statements, and apply discount or capitalization
rates where 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
whatever time parties have left, whichever occurs sooner.
Agreement Comes at the End. Most agreements
are reached in the last 30-45 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 their remaining options
and understand that we are unavailable to appraise the subject
In most represented cases a formal voir dire is conducted
and the settlement outline can be used to enforce the agreement.
In some instances partners agree upfront to “Med-Arb”.
That is if at the end of the session there are 2-3 issues
that are not agreed, we simply “make the call”
and agreement is readied. There are, many variations on this