Independent, Cost-Effective, ESOP Valuation Services

ESOP/Valuation Resources

The ESOP Association is a national non-profit membership organization with 18 local Chapters, serving approximately 2,500 employee stock ownership plan (ESOP) companies.


The National Center for Employee Ownership is a private, nonprofit membership and research organization that serves as the leading source of information on employee stock ownership plans.


The American Society of Appraisers is the nation’s oldest and only major appraisal organization representing all of the disciplines of appraisal specialists. This organization awards the accredited senior appraiser (ASA) designation.


The CFA Institute is a leading international organization focused on setting high standards of ethics, education, and professional excellence for the investment profession. This organization awards the chartered financial analyst (CFA) designation.


ESOP FAQs

About ESOP ValuationsACA ESOP Valuation

Valuation of an ESOP is generally more complex than a regular valuation of a business.  An ESOP valuation must correctly incorporate all of the traditional business valuation issues, relating to fair market value, control premiums, liquidity discounts, tax pass through status, and other factors. In addition, the valuation of an ESOP should be able to withstand the potential of challenges by an employee or either of the federal agencies, the Internal Revenue Service (IRS) and the U.S. Department of Labor (DOL), with enforcement responsibility for ESOPs. The DOL has the responsibility for administering the Employee Retirement & Security Act of 1974 (ERISA) regulations for ESOPs. These regulations add the "adequate consideration" standard to the fair market value standard of IRS valuation review, and ESOP valuations must support their review.  As such, valuations that are subject to third party review must include considerable background detail so that potential third party reviewers will have a clear understanding of the process leading up to the value conclusion.

 

Are there different types of ESOP valuations?

Few companies would be willing to adopt an ESOP before determining whether or not the value of company stock will support management objectives.  As such, our appraisers offer valuations for feasibility purposes to aid in determining whether an ESOP makes sense for your firm.  Since this valuation is for internal management purposes, much of the time consuming company and industry background report writing can be eliminated since company management is already fully aware of these matters.  However, all other pertinent factors are considered in the analysis leading to the value conclusion and all requisite financial data and valuation methods used for a full valuation report are addressed in the feasibility report as well.

In addition to these feasibility analyses, our appraisers will also provide full valuation reports required for the establishment of an ESOP, annual updates for compliance with IRS and DOL regulations for plan Trustees, and fairness opinions, if necessary, for the company Board of Directors and financial institutions when the ESOP is established.  These various reports are summarized below:

  • Original ESOP valuations
  • Annual ESOP update valuations
  • Feasibility analysis for both C and S corporations
  • Fairness Opinions for ESOP purchases and plan terminations

 

Why is an outside party needed to value ESOP shares?

From a strictly regulatory standpoint, a valuation of ESOP shares by an independent third party is required by the Department of Labor (DOL) and the Internal Revenue Service (IRS).  The regulatory requirement stems from the practical need to insure that the value is determined by a party who does not have a personal or financial interest in the valuation result.  You must have an appraiser figure out what a willing buyer would pay a willing seller, assuming both have all the relevant information they need to make the transaction.  The valuation, moreover, should be performed n behalf of the ESOP trustee since it is the duty of the trustee to insure that transactions with the ESOP are consummated at “fair market value.”

 

What is the cost of an ESOP valuation?

The fees charged for ESOP valuations vary considerably from one valuation firm to the next.  There is no set industry standard or prescribed range.  This is due to the wide variation in the amount of work that may be involved between one engagement and another.  As a general rule, the cost of an initial valuation for a newly formed ESOP will be higher than the subsequent annual update valuations.  This is because of the amount of time and work involved in gathering and analyzing all of the financial, industry and other pertinent information for the initial report.  The update, on the other hand, need only focus on changes in financial and other factors that have occurred since the prior report.  The unique cost structure of ESOP Valuation Group enables us to provide extremely competitive pricing, particularly with regard to annual valuation updates.

 

How Do You Find a Good Appraiser?

Different ESOP appraisers have different approaches to key appraisal issues, such as discounts for lack of control or liquidity, or in their general appraisal approach (such as whether they rely more on earnings multiples or on comparable companies). These will have a potentially dramatic affect on value. Initial assumptions tend to get locked into your ongoing ESOP appraisal. It will always arouse suspicion if, a few years after the first ESOP appraisal, you decide you are unhappy with the approach and choose someone else who comes in with a different set of assumptions. Your business won't have changed, but ESOP participants and the IRS may now see a very different appraisal number. At best, you have a serious communications problem; at worst, you have a lawsuit or problem with the government.  ESOP Valuation Group appraisers are keenly aware of these issues.  Whether you are just beginning your ESOP, or you are looking for a new appraiser for your existing ESOP, you can be sure that our appraisers will bring consistency to the valuation approach and methodology.

 

What Should an Appraiser Know?

The appraiser's client, by law, is the ESOP trust, no matter who actually writes the checks to cover the fees. This has important implications. First, the letter of engagement should clearly specify that the appraiser is working for the ESOP. Second, it means the appraiser is not trying to find the highest price that can be justified or, as in some tax-oriented appraisals, the lowest. Third, it should remind everyone involved that the point of the appraisal is to protect the interests of the ESOP participants from paying more than fair market value.

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