Employee Stock Ownership Plans (ESOPs)

Privately held companies sometimes include an interest in the company as part of employees' annual bonus.  This is often referred to as an incentive ownership arrangement, in which the employee is given stock ownership in the company to encourage him or her to remain with the company. 

These plans 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.

Hypothetical scenarios that require an expert in business valuation:

The owner of a company wants to incentivize his employees by providing them with an interest in the company in the form of stock; however, since the company’s stock is not publicly traded the owner does not know how much the shares of stock are worth. A business valuation by an independent appraiser would be needed to determine the fair market value of the shares being provided to the employees.

A 100% ESOP Company has an employee who is retiring and wants to sell his shares of stock in the company back to cash in on part of his retirement. The company has not recently had a valuation report performed on the fair market value of the company. In order for the employee to sell his shares, the company needs to know how much they are worth. Consequently, a business valuation by an independent appraiser would be needed to determine the fair market value of the shares being sold by the employee.

Special Considerations for ESOP Valuations:

ESOPs can provide many benefits to a company's stakeholders. It can incentivize and promote efficient work from employees while at the same time allowing 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 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 critical since the valuation methodologies and discounts must be adequately supported.

Every ESOP is different and because of this it is crucial for the appraiser to understand the 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.