by Greg Caruso | Feb 22, 2025 | ESOP Business Valuation, Estate and Gift Tax Business Valuation, SBA Business Valuation and Appraisal
You need a business valuation or a business appraisal. You might need the business valuation for Estate and Gift business taxes, applying for an SBA loan, ESOP stock value, or a host of other reasons. How can you make sure that you obtain the most accurate business valuation possible?
The business valuation is going to tell a story about your business. This story will contain a narrative backed up by statistics, facts, and figures. This story must make sense when it is complete. Your job as a business owner obtaining a valuation is to make sure the story, facts, and figures are clear and sensible to the experienced valuation professional appraising the business.
Below are 5 steps business owners should take to make sure your business valuation is as accurate as possible.
THE 5 STEPS
- Be able to explain why your product or service is so desirable you can continue to make a high profit
The most important thing in valuing your business is understanding how you create and keep a market of customers that will pay enough for your product or service that you can be expected to continue making a profit. Do you have patents keeping others out? Do you have a unique distribution channel? Do you have better internal systems and people? This is the core of the business valuation. How your business makes money and how it will continue to do so. The ability to clearly and succinctly explain that is key to the valuer understanding your business and getting the valuation correct.
- Have quality financial information.
You must have quality financial information. A business valuation is, to a large extent, a review of your past financial results and a projection of your future financial expectations. Without clear data it is very difficult to see the details necessary to make correct assumptions and calculations. In addition to historic financial information, business plans and useful projections consistently kept will add to the valuer’s understanding of the business.
- Have leases and major contracts in good order
Leases, customer contracts, loan documents, and the like may not make a business, but if they are not in good order a business may suffer major losses quickly. These documents in good form reduce risk which increases value. Have the major legal documents your business relies on updated and accessible, so you can provide them when asked.
- Have systems outlined and resumes of key people
Simply put, a business is a series of systems that produce a product or service, hopefully at a profit. Most businesses have many systems that are run by people. True high-quality systems are where “normal people obtain extraordinary results every time.” This requires great systems, great training, and very good people. Make sure you can document all of these.
- Hire an experienced valuation professional.
Clearly, the valuer must have the background to understand how actual businesses on the ground work and how that translates into value. Business valuations are performed for specific purposes – sales, SBA loans, ESOP structuring, divorce, Estate and Gift Tax. While it might sound crazy, it is a fact that the purpose can often significantly change the correct business value found. Make sure the valuer understands and has performed valuations for your purpose. Finally, make sure they have sufficient background and training in the fundamentals of business valuation.
These five steps lead to a consistent well-run business and obtaining a correct business valuation. Business valuation does have an element of the old saying, “garbage in – garbage out.” As a business owner you do play an important role in obtaining a proper business valuation.
by Greg Caruso | Feb 21, 2025 | ESOP Business Valuation
In January 2025, the Trump administration’s executive order imposed a regulatory moratorium, freezing the Department of Labor’s (DOL) proposed guidance on Employee Stock Ownership Plans (ESOPs). The DOL had intended to release new rules on January 22, 2025, which would have introduced guidance on establishing fair market value for ESOP stock transactions and proposed a new safe harbor for initial ESOP transactions. These proposals were designed to bring more clarity and protections to ESOPs, but now they are on hold.
The moratorium means that any new regulations under the DOL’s proposals will be delayed until further review or modification by the administration. This move is part of a broader effort to reevaluate and potentially roll back regulatory changes set by the previous administration.
For businesses and ESOP trustees, this means they will continue to follow existing rules until any new guidance or regulatory updates are confirmed.
READ MORE
by Greg Caruso | Nov 17, 2023 | ESOP Business Valuation
Humans have a natural desire for autonomy and independence. When management’s style consists of only telling employees what to do, this can lead to lower self-esteem, resentment, and anxiety in employees.
ESOPs (Employee Stock Ownership Plans) can lead to a better management style that can positively impact both employees and profit. ESOP managers often use a more employee-centric style.
With an ESOP in place, employees become co-owners of the company, and their success is tied to the company’s performance. This shared ownership instills a sense of purpose and commitment among employees, as their efforts directly contribute to their financial well-being.
Management in an ESOP company often seeks input and feedback from employee-owners before making significant decisions. There is a greater emphasis on empowering employees to take ownership of their work and make decisions that impact their departments or roles. This empowerment enhances job satisfaction and company loyalty.
ESOP managers often share financial and operational information with employees to keep them informed about the company’s performance. This transparency builds trust and encourages open dialogue between management and the workforce.
ESOP companies often invest in employee development and training. By empowering employees with the knowledge and skills they need to excel in their roles, management fosters a culture of continuous learning and improvement.
By aligning employees’ interests with those of the company and promoting shared ownership and decision-making, an ESOP can create a positive work environment where employees feel valued, empowered, and motivated to contribute to the company’s success. This results in higher productivity and more profit for both the company and the employees.
by Greg Caruso | Aug 4, 2023 | ESOP Business Valuation
Join Gregory Caruso at The ESOP Association Multistate Regional Conference 2023 in September as he presents “Your ESOP Valuation: More Than Just a Number” with co-presenter Sarah von Helfenstein. Certainly, the value found is the key of any business valuation, but valuations also contain so much other information that is useful to management and trustees. Learn from an experienced former small business owner and ESOP valuator what attributes should be compared and analyzed to use your business valuation not just for the number, but as a management tool. In this session, we will dive deep into the intricacies of ESOP valuation, moving beyond the surface-level numbers to uncover the key elements that provide a valuation appraiser and more importantly, management and trustees insight into a company’s value. This is an important topic for all ESOP trustees, plan administrators and employee-owners. It can become a management tool for trustees and management and allow employee stock owners to participate more fully in the success of their company. Internal and third-party Trustees will learn what to look for and how to better assess a value conclusion provided by a valuation appraiser.
Register for the Conference here.
by Greg Caruso | Jun 12, 2023 | ESOP Business Valuation
Key Performance Indicators (KPIs) can be an effective tool for measuring and monitoring the success of an Employee Stock Ownership Plan (ESOP). Here are some steps to effectively use KPIs in an ESOP:
- Identify relevant KPIs: Identify the specific KPIs that are most relevant to the ESOP’s goals and objectives. These may include financial metrics such as revenue, profit margin, and return on investment, as well as non-financial metrics such as employee engagement, customer satisfaction, and employee retention.
- Set benchmarks: Set benchmarks or targets for each KPI based on past performance, industry standards, or other relevant factors. These benchmarks should be realistic and achievable, but also challenging enough to encourage continuous improvement.
- Track and measure KPIs: Establish a system for tracking and measuring KPIs on a regular basis, such as monthly or quarterly. This may involve using software tools or spreadsheets to collect and analyze data.
- Monitor progress: Use the KPI data to monitor progress toward achieving the established benchmarks or targets. This can help identify areas of strength and areas for improvement, and enable the ESOP to make informed decisions about how to allocate resources and make improvements.
- Use KPIs for performance evaluations: Consider incorporating KPIs into performance evaluations for ESOP participants. This can help to align individual performance with the ESOP’s overall goals and objectives, and provide employees with a clear understanding of how their contributions impact the success of the ESOP.
- Adjust strategies as needed: Use the KPI data to make informed decisions about adjusting strategies and tactics to better achieve the ESOP’s goals and objectives. This may involve shifting resources, changing business processes, or adopting new technologies or practices.
Overall, using KPIs in an ESOP can help to align business activities with the ESOP’s goals and objectives, measure progress, and make informed decisions about resource allocation and strategy.
by Greg Caruso | Apr 28, 2023 | ESOP Business Valuation
Recently, the Department of Labor (DOL) committed to a regulatory process to develop new guidelines for ESOP valuations https://www.nceo.org/employee-ownership-blog/dol-commits-regulatory-process-esop-valuation-guidelines. This development has important implications for ESOP trustees who are responsible for ensuring that valuations are conducted properly and in compliance with DOL regulations.
Key Takeaway 1: The DOL is committed to ensuring that ESOP valuations are conducted properly.
This is good news for ESOP trustees who are responsible for ensuring that valuations are accurate and in compliance with DOL regulations. It’s important for trustees to stay up to date with any new guidelines that are issued so that they can continue to fulfill their fiduciary responsibilities and ensure that plan participants are receiving accurate valuations of their ESOP holdings.
Key Takeaway 2: New guidelines could provide more clarity and consistency in ESOP valuations.
One potential benefit of new ESOP valuation guidelines is that they could provide more clarity and consistency in how valuations are conducted. This could make it easier for ESOP trustees to select qualified, independent appraisers and ensure that valuations are conducted in compliance with DOL regulations. More clarity and consistency could also make it easier for plan participants to understand the value of their ESOP holdings and make informed decisions about their retirement planning.
Key Takeaway 3: ESOP trustees must continue to be vigilant in ensuring compliance with DOL regulations.
While new ESOP valuation guidelines could provide more clarity and consistency, it’s important for ESOP trustees to remember that they are ultimately responsible for ensuring compliance with DOL regulations. Trustees must continue to be vigilant in selecting qualified, independent appraisers, ensuring that valuations are conducted properly, and fulfilling their fiduciary responsibilities to plan participants. Any new guidelines issued by the DOL should be seen as a tool to help trustees fulfill these responsibilities, rather than a replacement for their ongoing diligence and oversight.
Additional thoughts:
New DOL regulations could potentially benefit ESOP owners if they were designed to provide more clarity and guidance around certain aspects of ESOPs. For example, the DOL could provide more guidance on the selection and responsibilities of independent appraisers, which could help ensure that ESOP valuations are more accurate and consistent.
The DOL could also provide more guidance on how ESOP trustees can fulfill their fiduciary responsibilities, which could help prevent conflicts of interest and ensure that plan participants are receiving the best possible management of their ESOP.
Another area where additional DOL regulations could be beneficial is in providing more flexibility for ESOPs. ESOPs can be a powerful tool for business owners looking to transition ownership of their companies to their employees, but the current regulations can be complex and restrictive. Additional regulations that allow for more flexibility in how ESOPs are structured and managed could make them more attractive to business owners and potentially lead to more widespread adoption of this retirement plan option.
It’s important to note, however, that any new regulations should be carefully considered and designed to balance the needs of plan participants with the needs of business owners and the broader economy.
