ESOP VALUATION KEY POINTS

Employee ownership is based on esop valuation, which are fundamental to the process. When a corporation first considers an ESOP, its fair market esop valuation can help guide plan feasibility, structuring, and financing decisions. Once a plan is in place, yearly esop esop valuations determine how much an employee's assigned shares are worth.

The underlying workings of ESOP values are frequently a source of consternation for both plan sponsors and participants. What exactly is fair market value? How does it compare to the book or strategic value of a company? Who makes the decision?

The answers to these and other issues have serious financial and tax repercussions.

The Main Characters

The Employee Retirement Income Security Act of 1974 governs employee stock ownership schemes (ERISA). With this regulatory background in mind, it is critical to understand the parties involved in an employee stock ownership plan esop valuation.

Trustee of an ESOP

A trustee is the chief representative of an employee trust, acting as the shareholder of record and owing a fiduciary duty to all plan participants. As a result, they are responsible when share price disputes are filed against an ESOP. While getting advice from their legal and financial consultants, trustees ensure that plan sponsors comply and execute the requirements of an ESOP plan document.

 

The ESOP Procedure and esop Valuations

An impartial esop valuation is required when establishing an employee stock ownership plan. A director engages an outside appraiser to evaluate the company's fair market value in a leverage ESOP transaction, in which a company's shares is sold to an employee trust (FMV). The value will be used by the ESOP trustee to negotiate the final sale price with the plan sponsor.

A contributory ESOP allows a firm to issue new shares to an employee trust while receiving a tax credit for the fair market value of those shares on the contribution date. Each time new shares are issued, an independent appraisal is undertaken to calculate this corporate income tax advantage.

Following the formation of an ESOP, an independent appraiser will undertake an annual appraisal of the plan sponsor. This esop evaluation establishes a market value for employee-owned stock. When workers retire or leave the firm, their vested shares are repurchased by the sponsor at the most currentesop  price.

Diligent Research in Valuation

An individual appraiser's valuation procedure is highly nuanced, but corporations may anticipate the following common due diligence requests:

• Financial statements from the past (audited or reviewed)

• Year-to-date internal financials

• Forecasts for the next five years, as well as supporting operational data

• Outstanding mergers and acquisitions offers

• Recent values performed by a third party