When people disagree about the value of something, the “seller” of the thing tends to believe it is worth more than the “buyer” and negotiates accordingly. This framing of the negotiation tends to encourage people to go too high or too low to assure the outcome they seek. Once one party puts in an “anchoring” number, the discussion changes and may not reflect the thing’s true value. By using the methods described below, people sort out the disagreement before it arises. For example, this works with joint venture and buy/sell of a business when either party could be a buyer or a seller, right of ways and other easements, lost profits if either party breaches a contract, distributions in estates and many other situations.
The simplest method is for the contracting parties to agree in advance that a specific person will decide the agreed value and not to contest that specific person’s conclusion. If a specific person (or an alternate) can’t be found, the following methods are suggested.
Method #2. Each person retains an outside expert with an agreed-upon expertise (certification, industry experience, etc.) that values the venture or thing at issue.
If the average of the two numbers is within x% of each individual valuation, then the average becomes the agreed upon valuation.
If the average of the two numbers is outside x% of each individual valuation, then a third valuation is done by an expert with the same agreed-upon expertise and the third expert is paid for equally. If the 3rd valuation falls between the two individual valuations, then the average of the 3rd valuation and the number nearest to the 3rd valuation is the agreed upon valuation. But if the 3rd valuation falls outside the other two valuations then the agreed upon value is the average of the 3rd expert’s value and the one nearest it.
This method encourages realistic valuing, not anchoring, with values too high or too low for negotiating purposes.
Method #3. Final Offer Baseball. Each joint venturer submits a final offer to a neutral person (see article on Mediation Clauses on how to pick a neutral). The neutral then adopts one of the proposals which the neutral is persuaded is closest to the true value of the thing being valued. This method incentivizes each party to be as reasonable as possible with their proposals: the opposite of framing and anchoring.
Alternatively, the neutral could arrive at a value of the thing valued before receiving the values from each venturer.
The benefits of all these methods is that the agreed upon solution is not a simple Solomon-like midpoint between the various proposals. The other benefit is that costly litigation is avoided, and parties can get back to business and their lives.