Litigation Outlook: The Ins and Outs of Using a Neutral Appraiser

5/17/2016 - By Zachary Farrington

One of the most interesting trends in business valuation today is the use of a neutral valuation professional — one appraiser retained by both parties in a dispute. The most obvious benefit of this approach is financial: Hiring one valuation expert saves money for both sides.

However, using one appraiser also saves time and — at least theoretically — diminishes the likelihood of both parties fighting over whose valuation is most worthy.

How It Works

There are several different ways a neutral valuation professional can be retained, including these:

Pendulum arbitration: This arrangement involves hiring a neutral valuation professional to select which of two valuations is more valid. The neutral valuator reviews the valuations produced by other appraisers for each side and picks a winner. Both sides agree to go with this decision.

Final opinion: Here, the neutral valuation professional is asked to determine a value and all parties agree to move forward with what he or she decides. In disputes like these — which might involve several shareholders, for example — at least one party is usually unhappy with the outcome, though.

Therefore, it’s common for the valuator to ask for “quasi-judicial immunity” — this means he or she can’t be sued by any of the parties. Quasi-judicial immunity can be granted by the judge overseeing the case, or it can be agreed upon in the engagement letter (see below).

Negotiable opinion: Sometimes both parties will hire one neutral professional to arrive at an opinion of value. But unlike the “final opinion” arrangement above, the parties reserve the right to criticize the valuator’s conclusion. They are allowed to offer feedback and try to sway the analyst’s opinion.

This arrangement doesn’t feel quite so risky to the parties involved. They have some sense of control and feel like they have some recourse if the valuation isn’t what they expected.

Yes or no: In this arrangement, the neutral valuator arrives at an opinion and both parties examine it and decide whether to accept it or not. The valuation professional is often providing a starting point for negotiation and sometimes can even help facilitate the discussion and decision between the parties.

A neutral valuation professional can be appointed by the court or hired by the parties involved. Payment of his or her fee is typically split between the parties.

Letters of Engagement Are Key

The success of using a neutral valuation professional often hinges on the agreements spelled out in the letter of engagement. This document should detail every part of the arrangement, including:

Scope of work: What exactly is the neutral expert expected to produce? For example, is he or she going to issue a formal report or just a calculation of value?

Fees: How much will the valuation analyst be paid, by whom and by what date? One party might be upset with the outcome of the valuation and balk at paying the expert. The letter of engagement must be explicit about what’s expected.

Communication: Interaction with both parties is expected, but there are still communication issues to work out. For example, the letter should clarify whether the analyst can speak to the parties without their lawyers present and, if so, under what circumstances.

Process: The letter of engagement should outline the process the analyst will use to gather information and provide a timeline for analysis and issuance of an opinion.

The popularity of using a neutral appraiser is likely to increase given the cost and time savings involved. Be sure you look for a valuation professional with the temperament and experience to work with opposing parties simultaneously.

Interested in a neutral appraiser? Ask our valuation team for more information.