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:
- 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.
- 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).
- Special Considerations
- DOL expectations require additional documentation that must be compiled by the Trustee including:
- ESOPs with debt must have documented whether the terms are favorable between the ESOP sponsor and any executives in the company two years prior to the transaction.
- Explanation of the differences between the current valuation and the most recent valuation performed within the prior two years.
- All reports must identify any risks that may cause the financial projections to fall materially below the projections included in the report.
- DOL oversight of the valuation advisor also requires certain process and analytical disclosures within the valuation report.
By statutory requirement, all closely held corporation ESOPs formed since 1979 incorporate a put option provision. This statutory requirement to allow departing ESOP participants to “put” their distributed employer corporation securities back to the sponsor company at fair market value is often referred to as the ESOP repurchase obligation. As ESOPs mature, the contingent liability associated with the ESOP repurchase obligation must be analyzed as part of the valuation analysis because it may have an impact on the fair market value the shares.
At Evergreen Advisors, we understand that a well-documented, independent, unbiased valuation of an ESOP company’s stock is a critical part of the process.
Our services associated with Employee Stock Ownership Plans include, but are not limited to:
- Valuation for Initial Sale
- Valuations for Annual Contributions
- Fairness Opinions for ESOP Transactions
Have questions? For more information about our Business Valuation Services, please contact us at 410-997-6000.
