Determining the Share Value of an ESOP Company

Determining the Share Value of an ESOP Company

by | Mar 21, 2023 | ESOP Business Valuation

As a trustee of an ESOP company, it is important to understand the primary drivers of value. We call them People, Processes, Profits. While simple, if you always keep these factors in mind, it will help you make informed decisions on correctly pricing annual shares. Some details about these simple factors that can help you determine how your ESOP company should be priced include:

People – basically the business and the people that run it.  Does the sum of the parts create resiliency or is the ESOP-owned company brittle? Here are a few more items to consider when valuing your people.

  • Business Model: Look at the company’s business model to determine whether it is focused on producing a few products or services or has a more complex business model with multiple products, services, and business lines.
  • Market Position: Evaluate the company’s market position to determine whether it is a market leader or a follower. Is your company a market leader in a specific niche? Is your company focused on disrupting existing markets or creating new ones?
  • Management: Assess the company’s management team to see if it has a track record of successfully managing a simple or complex business model. Winners tend to solve problems and win. Other companies never quite reach their potential.
  • Staff:  Many businesses rely on highly trained technical staff.  Whether they are licensed mechanics, highly trained programmers,  or professional personnel, having a well-trained cohesive team to implement processes is essential.

Processes

  • Does the Company have well defined processes and procedures for all necessary components of the business? This applies from initial lead generation right though final invoice collection and after-the-sale (or perhaps making the next sale) customer care.
  • Does the Company have the Processes in place to prepare projections and goals? (This is like playing chess and thinking 3 or 5 moves ahead.)
  • Do they have regular management meetings and regular staff meetings where goals are reviewed, bottlenecks are resolved, and people are listened to?

“A company has excellent processes when Average People get extraordinary results Every Time.”

Profits

  • Does the Company consistently make money, or are there frequently reasons why goals were not met? 
  • Are gross profits (including reasonable allocations of soft costs) estimated on jobs, product lines, services?  Can more of those goods or services be sold?

In summary, as a trustee of an ESOP company, it is important to understand the company’s People which encompasses the business model, market position, and management; it’s Processes including goal setting and review; and Profits to determine its share value. A highly resilient, consistently profitable business has high value. This can help you make informed decisions that are in the best interest of the plan participants and beneficiaries.

Selecting an ESOP Business Valuator

Selecting an ESOP Business Valuator

by | Aug 18, 2022 | ESOP Business Valuation

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.