Succession Valuation Talk to an advisor: (816) 743-7700

3 Key Ingredients to an Independent ESOP Valuation

November 3, 2021
By Bryan Moore

There comes a point in every business owner’s tenure when it is time to depart the business. Speaking to business owners, you are likely proud of your company and the employees that helped you build it. An excellent way to reward your employees and retain the culture that you have built is to make them owners of the company by selling shares or units, partially or entirely, to a trust as part of an Employee Stock Ownership Plan (ESOP). Not only does an ESOP provide tax benefits to the company and you, but also to the employees who will develop an ownership mentality whereby their day-to-day decisions will impact their own financial wellbeing as well as the wellbeing of their fellow employees.

In thinking about this exit option, you will want to understand how to value the company’s shares or units for an initial sale to the ESOP and how future updated valuations (prepared at least annually) will affect the ongoing ESOP operations. For the initial sale, the ESOP trust’s fiduciary, who is required to act in the best interests of the contemplated or actual plan participants, should seek an independent valuation to determine the fair market value of the shares or units to ensure that the sale be for “adequate consideration” (29 C.F.R. § 2510-3(18) (b)).

1. Complying with Regulatory Agencies

Independent valuations are required. ESOPs are complex transactions which are scrutinized to ensure regulatory standards are met. The Department of Labor and the Internal Revenue Service both mandate that an independent appraiser, sought out by the ESOP trust’s fiduciary, prepare a valuation on behalf of the participants. This requirement is designed to ensure that the ESOP fiduciary is independent and unbiased in determining the value the company’s shares or units.

From utilizing proper valuation methods and writing concise and thorough reports to complying with regulatory standards, bringing in an experienced appraiser from MarksNelson can help ensure there are no pitfalls when it comes to complying with various standards.

2.  Understanding Value

Valuations have many moving parts and can be overwhelming to those unfamiliar with them. Seeking the expertise of MarksNelson’s valuation professionals can assist in familiarizing stakeholders with the valuation process and conclusion.  As part of the valuation process, MarksNelson’s appraisers consult and work closely with management who understand the company’s operations to translate the gained understanding into the valuation process and thereby reach a more accurate conclusion of value as well as improve the appraisers’ ability to clearly communicate the valuation results to end users. Laying the groundwork in the initial valuation also sets the stage for future valuations. The end result is a well-reasoned, supportable opinion of value for the company’s shares or units.

3. Repurchase Obligation

So, what happens to the shares when a plan participant departs the business, whether that be voluntarily or involuntarily? 

As is customary with most ESOPs, the plan document grants to the participants a put option where the ESOP trust is obligated to repurchase shares or units from the participants in the event of a departure from the company. This statutory and contractual obligation of the ESOP sponsor to purchase shares or units distributed from the ESOP, if not planned for, can put financial strain on the company.  The MarksNelson team can consult with management, using forecasts and projections to ensure the repurchase obligation is adequately funded. Providing different scenarios of potential outcomes can give peace of mind that the company is prepared to address the eventuality of departures of plan participants who have a right to be paid out for their shares or units.

By applying our knowledge across a variety of industries, we can assist you in valuing ESOP shares or units and meet your ESOP needs. Our goal is to ensure that ESOP trustees as well as plan participants understand the value of the plan shares or units and that management has a well thought out plan to successfully navigate future events. The valuation team at MarksNelson can help accomplish these goals by laying the groundwork and assisting in the maintenance of a successful and long-lasting ESOP.

Bryan Moore Bryan Moore

Bryan Moore provides valuation services for clients across a wide range of industries. He is a diligent researcher, giving time and care to each client navigating the process. He loves working with clients to help simplify the process and understand how and where each company’s value is derived. Many of our clients are getting a valuation for the first time, and Bryan takes pride in guiding them through the process.

Woman rejoices at cliff


Subscribe to receive email updates intended to support your business operations, mitigate risk, and help you grow.