The determination of a stock’s fair market value is critical in establishing and maintaining an ESOP, and is necessary to satisfy relevant IRS and Department of Labor (ERISA) requirements. In addition, an accurate estimate of value is needed by the ESOP’s trustee to meet fiduciary responsibilities. In valuing the stock of a closely-held company, we perform valuations in connection with both the initial ESOP transaction as well as valuation updates on an annual basis thereafter. There are three types of valuations done for ESOP purposes:
- Preliminary Valuation: Before a firm dedicates substantial time and money to the process of establishing an ESOP, a preliminary valuation is often a good idea. It provides management and shareholders with an approximate indication of the company’s value before deciding to proceed with an ESOP. The preliminary valuation can also be used to compare the ESOP with other alternatives available to the shareholders.
- Initial Comprehensive Valuation: ERISA regulations permit an ESOP security transaction only if such transactions are performed at fair market value. The comprehensive report must include: summary of qualifications, purpose of valuation with disclaimers, methodology and reasoning, description of business, industry and economy, earnings or dividend-paying capacity, relevant discounts and premiums, and all other relevant facts.
- Annual Update: IRC Section 401(a)(28)(c) mandates annual valuation of an ESOP by an independent business appraiser. In addition, ESOPs contain a “put option” enabling plan participants, retired participants, and beneficiaries to sell distributed ESOP shares back to the trustee at fair market value. The price at which this transaction occurs is updated annually. An annual update is less difficult and costly than the initial comprehensive valuation study since our staff has since become familiar with the company and financial data.
Delphi has extensive experience working with numerous ESOP companies in various industries. We have valued leveraged and unleveraged ESOPs, controlling and non-controlling ESOPs as well as early stage and mature ESOPs.