7 Ways to Involve More Than One Appraiser

It is not uncommon to see parties to a transaction or arrangement engage more than one valuation firm to arrive at fair market value. This is especially true when the parties have both referral and financial relationships and risk implicating federal physician self-referral laws. However, there is a difference between using separate appraisers and “opinion shopping,” the latter of which can be a very risky proposition. The scenarios below provide some examples of the use of multiple valuators, when they are effective, and when they become very costly.

1. Separate BV and CV appraisers. One appraiser conducts the business valuation and another performs the compensation valuation. This can become a problem, particularly because post-acquisition compensation significantly impacts the income approach to the business valuation and requires the appraisers to communicate clearly on issues of compensation and projections of practice earnings.

2. Separate real estate and M&E appraisers. One firm values the business enterprise and/or physician compensation, while real estate and equipment are appraised separately. The business valuation firm often incorporates the work of the equipment and/or real estate appraiser into its report, thus requiring communication on the application of BV methodology to ensure that there is overlap or duplication in the valuation of the assets and the business enterprise.

3. “Buyer” engages one valuator and “seller” engages another, each of whom performs a separate valuation. Aside from cost of two valuations, this can become problematic if the valuations differ by more than an immaterial amount. For example, the parties may agree to average the two valuations or use each to create a range of FMV. However, if one valuation is unsound or employs different assumptions, using that valuation for purposes of averaging or creating a range may yield an incorrect conclusion of value. Ideally, when each party brings its own appraisal to the table, it is best to connect the two valuators to collaborate and narrow or eliminate any differences.

4. First party engages the first appraiser, while second party engages a second appraiser to review the first opinion. This is a less costly than each party ordering separate valuations. The reviewer serves to point out errors, incorrect application of theory, flawed assumptions, or other items in the first appraiser’s valuation, with a goal of arriving at a conclusion of value that both experts can agree represents FMV.

5. Each party contracts for a valuation, and a third valuator is engaged to review the first two. Often the most costly option, the third party in this case facilitates the reconciliation process by bringing a third viewpoint to a review of the first two appraisals.

6. One or both parties contract for an appraisal, and an interested third party, such as a court, bank, or ex-spouse, orders a second appraisal. Again, getting the experts together to reconcile any differences is important to arriving at a reasonable conclusion.

7. One or both parties engage the first appraiser; then one or both parties engage a second appraiser because of dissatisfaction with the first. Dissatisfaction could result from poor client service, commission of errors, or exercise of poor judgment. In most cases, the second opinion is accepted, which may give rise to concerns of opinion shopping. Naturally, documentation of the process is critical and may include documentation of errors in the analysis, incorrect application of valuation theory, misunderstanding of the scope, or failure to complete the work.

The most significant problems associated with engagement of more than one valuator relate to irreconcilable differences in theory and when opinion shopping appears evident. Asking the valuators to reconcile any differences is the preferred method for reaching a defensible conclusion of FMV. As always, consistently using valuators with strong credentials and experience in the healthcare industry is the first step in documenting FMV in transactions involving referral sources.