As business valuation professionals, we are often tasked with determining the value of a block of stock in a company, typically a partial interest, for purposes of gift or estate tax planning, stock option issuance, ESOP compliance, or marital disputes. The appropriate standard of value for such assignments is “Fair Market Value.”

Fair Market Value is defined as the price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy, and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts.

Fair market value does not consider the synergies of a specific buyer. Instead, it contemplates an unrelated, third-party buyer and assumes the company continues to operate as a stand-alone business. Valuation professionals must also consider the rights and restrictions specific to the block of shares (or partial interest) that are being valued.

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On March 18, 2020, YUM! Brands, Inc. (NYSE: YUM), a worldwide owner and operator of restaurant brands, acquired The Habit Restaurants, Inc. (NasdaqGM: HABT or “Habit”) for approximately $408 million in cash.  At the time, Habit operated 245 company-owned and 31 franchised Habit Burger Gill restaurants in the U.S. and in China.  According to YUM’s 10Q filing, Habit expected to benefit from the global scale and resources of YUM.  As a result of the transaction, YUM recorded $219 million of goodwill and $98 million in brand/trademark value based on the analysis of a third-party valuation firm. [Read more…]

With the rapid spread of COVID-19 taking hold in the U.S. and across the world, publicly-traded stock prices have taken a beating. Additionally, as business, economic, and political uncertainties increase, private valuations in certain types of securities and industries will certainly take a hit this year. Although this may cause temporary pain in the form of lower portfolio and 401k balances, significant planning opportunities remain for high net worth individuals, business owners, and shareholders of privately held companies. It could be possible that those involved in online stock trading could navigate the financial landscape during this uncertain time to come out the other side in a strong position, after making smart investments. The federal government issued PPP loans to businesses to help them during this time, but after this is all done, will businesses be able to pay them back? The rules for how to get a Payroll protection loan forgiven are here and must be looked at by all businesses who worry for after this is over.

Take Advantage of the Exemption from Estate, Gift and Generation-Skipping Transfer Tax – With everything that’s going on, it’s easy to forget the significant changes that went into effect in 2018 with respect to the estate and gift taxes. To summarize, the federal tax law was changed to allow individuals to transfer double the amount that was previously allowed over the course of their lifetime free of tax. As of this writing, individuals may transfer $11.58 million and married couples up to $23.16 [Read more…]

While the appraisal of an Employee Stock Option Plan (ESOP) is very similar to other types of valuations of a private company, there are some complexities that require valuation expertise in ESOPs. The Employee Retirement Income Security Act of 1974 (ERISA) requires Trustees to obtain appraisals by independent valuation professionals to support ESOP transactions. An appraisal is needed when the ESOP initially acquires shares from the company’s owners and each year thereafter that the corporation makes contributions to the plan.

When the Trustees of an ESOP face issues related to appraiser objectivity and independence, qualifications, and knowledge of ESOP special considerations, they often look to Evergreen Advisors for valuation expertise. The following are the main reasons we are contacted for a change:

1. Independence and Conflicts

The number one reason ESOP Trustees engage the experts at Evergreen is when an ESOP appraiser is conflicted by providing services to either the company, board, or other related parties to the company. This includes accounting firms that have separate valuation practices. ESOP Trustees are opting to mitigate this risk by engaging truly independent valuation firms like Evergreen to perform critical compliance-related analyses.

2. Qualifications

ESOP transactions are regulated by the Department of Labor (DOL), and typically have significant tax and legal implications. Therefore, an ESOP valuation must be able to withstand scrutiny and potential challenges from multiple parties including the DOL, the IRS, and the ESOP plan participants. With the additional scrutiny being given to ESOPS by DOL auditors, it is imperative that the ESOP valuation appraiser also have the requisite valuation training, experience,  and credentials such as the Accredited Senior Appraiser (ASA), Accredited in Business Valuation (ABV), or Certified Valuation Analyst (CVA). [Read more…]

Although ESOPs are complex, highly regulated, and expensive to administrate, they can offer owners a tax-advantaged way to obtain liquidity.  The following are characteristics that may indicate your company is a good candidate for an ESOP:

• Consistent Earnings and Cash Flow – When a company sells to an ESOP, owners will typically finance the transaction with debt due to the unique tax advantages associated with ESOP debt.  However, annual debt service can be a significant drain on an ESOP company’s annual cash flow.  Therefore, to ensure the long-term feasibility and success of the ESOP, it is critical that the company not only be able to meet its debt obligations, but also have enough cash flow to fund future capital expenditures and working capital.  Companies with high-profit margins and consistent revenue streams generally make good ESOP companies.
• Adequate Size and Employee Base – Statutory requirements limit the amount of stock benefits that can be concentrated among shareholders.  Additionally, annual ESOP contributions are limited based on participants salary.  Therefore, a company with a large employee base is a better candidate for an ESOP than a company with a small employee base.  A good mix of “seasoned” and junior level employees is also helpful to smooth out the Company’s repurchase obligation as participants retire.
• Strong Entrepreneurial Culture – Companies that have a strong entrepreneurial culture are usually good ESOP candidates.  Employees that understand the connection between their jobs, the company’s profit, and ultimate value will be incentivized to increase that value as they become owners.
• Desire for Partial Sale – One advantage of selling to an ESOP versus sale to a third party is the option of a partial sale.  In most cases, strategic buyers and private equity firms are only interested in buying a controlling interest.  This is because these types of buyers want to influence the business operations to enhance their return on investment.  In the case of an ESOP, partial sales of at least 30% are allowed.  Owners may prefer a partial sale initially to retain control, continue legacy operations, and keep leverage levels reasonable.  The remaining interest can be sold gradually, over time depending on the cash flow of the business.  This structure offers a level of flexibility many owners are attracted to.

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