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ESOP Valuations

Valuations for Employee Stock Ownership Plans

Employees of any given organization can share in the ownership of a company by engaging in an Employee Stock Ownership Plan or ESOP. The ESOP was part of the Employee¬†Retirement Income Security Act (“ERISA”) of 1974. The goal of such plans was to empower and improve employee efficiency and to help align incentives. ESOPs are created as separate legal trusts from which money is borrowed from a lending institution and used to purchase the original entrepreneur’s shares in the organization. Employees can then purchase shares form the trust and the company can make contributions to the trust. to repay the loan.

As an incentive to form Employee Stock Ownership Plans, Congress has included the following benefits to business owners:

  • Sold shares of an ESOP are allowed to be reinvested in the market tax-free
  • Interest and principal loan repayment contributions made by the company to the ESOP are tax-deductible

Independent valuation of ESOPs are needed to determine share repurchase prices when employees leave, die or retire. ERISA requires that purchases from the trust be given at “adequate consideration.” In other works, fair market value is required as ESOP trustees, the IRS and the DOL can challenge the legitimacy of an ESOP valuation. Hence, a proper valuation of your corporate ESOP is needed to ensure the company’s shares are well-documented and unbiased.

Valuation Process

ESOP transactions in closely held companies must be based on a current appraisal by an independent, outside valuation expert. The valuation process assesses how much a willing buyer would pay a willing seller for the business.

When valuing an Employee Stock Option Plan, the following considerations are used:

  • Price-to-earnings ratios
  • Discounted future cash flows
  • Value of assets
  • Comparable company valuations

Discounts on valuation are frequently given for repurchase liability, lack of control and lack of true marketability. ESOPs are typically much more complex than your typical business valuation as they include adjustments for FMV, liquidity discounts and tax pass-through scenarios.

Initial Consulting

Initial a rough range of value is placed on the company itself. This range is what is later used to provide specific value for the ESOP itself. This initial assessment will help to determine whether or not an ESOP is even a feasible option for the company (ESOPs are not the best option for all companies). Next the appraisers nail down a more specific valuation on the business by creating a Business Valuation Report. This report is then used to determine the FMV of the shares held within the ESOP itself.

Annual Valuations

Annual valuation updates are helpful to our clients. Annual, semi-annual or quarterly updates can be helpful in determining fair market value of the ESOP (most prefer annual updates). Using the same rigor as when the ESOP was first valued, we create a comprehensive report for our clients, giving them an understanding of the changing dynamics associated with their ESOP. Annual renews are less expensive than the initial valuation.