609-664-7955 gcaruso@artofbv.com

Employee Stock Ownership Plans, better known as ESOPs, are required to have a compliant opinion of business value each year to assist the ESOP trustee in determining the share value for distributions and purchases of beneficiary stock. The trustee has the fiduciary responsibility of representing the employee shareholders, and has final say in determining the company’s share value. Selecting an experienced and professional ESOP business valuator is an important step in properly carrying out the ESOP trustee’s fiduciary duties and selecting the proper annual share value for the following year. 

ESOP Experience

A trustee should look for a business valuation company that has already done many ESOP valuations. ESOP valuations are governed by ERISA, the Department of Justice, and the IRS making them subject to serious review.  Because of the ESOP structures and ESOP accounting along with qualified options Employee Stock Ownership Plan business valuations are more complex than a general business valuation. The trustee should examine the independent business valuation company’s internal processes and methodologies to be sure they are a good match for the company being valued. Ask for references when selecting an ESOP business valuator. Close attention should be paid if any of the ESOP business valuations completed by the independent valuator have been challenged and the valuator had to make material adjustments as part of a settlement.

Assess “soft” elements of ESOP company

The independent ESOP business valuator will at a minimum review the past five years of financial records from the employee-owned company and their accountants. These are then compared to common sized financial statements and various financial ratios from similar companies within the same industry and the ESOP company’s past and expected future performance. This is followed by reviewing the most recent budget and forecasts for the company.  The business valuator also looks at the company management team, customer and/or supplier concentrations, the economic outlook, industry data, and other “soft” elements as part of assessing the risk of the ESOP company making the projected future cash flows. 

The ESOP business valuator will prepare all this information into a detailed business valuation report that contains an opinion or conclusion of value. The trustee then uses the valuation to assist in determining the price of the shares that will be distributed or purchased for the following year.