ESOP Valuation

Employee Stock Ownership Plans (ESOPs) are a powerful tool that allows a business owner to sell all or part of their business to employees. Selling company stock to employees can offer unique opportunities for both succession and estate planning, thereby providing the closely held business with a vehicle for continued growth and success. ESOP appraisals are a specialized area of business valuation that require independence and expertise as they face intense scrutiny from both the Internal Revenue Service (IRS), and the Department of Labor (DOL). Corporate Valautions, Inc. (CVI) has significant experience in providing initial valuations related to the ESOP transaction as well as annual valuations for ESOP administration. We provide a well documented report that clearly communicates the company’s value to the employees.

ESOP valuation services generally fall into one of two areas: initial ESOP transaction valuation/consulting services and annual (or updated) valuation services. A brief summary of each of these two areas is provided below:

Initial ESOP Transaction Valuation/Consulting Services:

Valuation consulting for an initial ESOP transaction is often a two phased project. In the first phase, appraisers are typically retained by the Company’s exploratory ESOP committe during the initial planning stages when the feasibility of the ESOP is still being determined. Our work in this first phase involves performing a valuation analysis to determine a rough range of value for the Company to help assess the feasibility of the ESOP. Reporting of the Company’s range of value in this phase is flexible, helping to contain fees during the preliminary feasibility determination stage. If after phase one, it is determined that the ESOP is not feasible, then our work is typically complete and project fees have been minimized for our client. However, if it is determined that the ESOP is feasible, then we will proceed with phase two. In the second phase, appraisers increase the scope of the valuation services being provided and prepare a comprehensive valuation report of the equity interest in the Company being sold to the ESOP. This report provides support for the transaction and ensures that no more than “adequate consideration” is being paid by the ESOP for the equity interest. CVI’s comprehensive valuation reports are considered an “Appraisal Report” as defined by the Uniform Standards of Professional Appraisal Practice (USPAP).

Annual Valuation Advisory Services:

CVI regularly provides annual valuation services (aka valuation updates) to our clients. Valuation updates can be performed quarterly, semi-annually, or annually, but are most commonly performed on an annual basis. In a valuation update, we determine the fair market value of the equity interest in the Company owned by the ESOP using the same careful attention to detail that was provided in our appraisal for initial ESOP transactions. A comprehensive valuation report is also prepared for each valuation update. The valuation update is utilized by our clients to determine the fair market value of the common stock in the Company owned by the ESOP for regulatory reporting purposes. The fees associated with providing an annual valuation update are generally less than the fees paid for our original appraisal of the Company since we can take advantage of efficiencies created from having previously appraised most companies.