Business Valuation for Employee Stock Ownership Plans (ESOPs)
Employee Stock Ownership Plans (ESOPs) must be independently appraised to establish a fair market value for the purchase price and or contributions. In most cases, company stock must be valued at least annually.
Special considerations for ESOP valuations:
ESOPs can provide many benefits to a company’s stakeholders. It can incentivize and promote effective work habits from employees while at the same time allow existing shareholders to diversify their investments. While ESOPs can provide many benefits, employers and their professional advisors must be certain that they conform to the requirements of the Employee Retirement Income Security Act of 1974 (ERISA).
A business valuation needs to be conducted when an ESOP is first established, and typically on an annual basis thereafter. Since shares of stock in a privately held company provided to employees are typically minority interests, a discount for lack of control and lack of marketability must be considered. Business valuation reports for ESOPs are typically reviewed by the IRS, which makes having a qualified, independent appraiser complete the task be critical.
Every ESOP is different which requires the appraiser to understand specific characteristics of the plan and the shares of stock being awarded to employees. For instance, some ESOPs may award non-voting shares of stock while others award voting stock. Other characteristics could include the timing of selling those shares back to the company, control prerogatives for the stock, and restrictions on the stock.
Documents required to complete an appraisal for ESOPs:
Profit and loss and balance sheet statements for the last three to five years
Interim profit and loss and balance sheet statements for the current year
Federal income tax returns for the last three to five years
Copies of any forecasts or projections
Operating agreement or any other shareholder agreements
