Employee Stock Ownership Plans (“ESOP”) were created in 1974 by the Employee Retirement Income Security Act (“ERISA”) as a vehicle to motivate employees by giving them company ownership. An ESOP is structured as a legal trust and is classified as a qualified retirement plan under the Internal Revenue Code. A trustee serves in a fiduciary capacity solely in the interest of the ESOP and its participants. Retaining an experienced, independent appraisal firm in the valuation of the closely-held employer securities is paramount in satisfying the trustee’s fiduciary responsibilities.

Valuations for ESOP purposes are necessary for two reasons. First, when the ESOP is originally formed, the initial purchase from the owner must be fairly priced. Second, the shares owned must be re-valued annually to determine the repurchase price in the event of employee retirement, departure, disability or death.

ERISA requires an ESOP to pay no more than “adequate consideration”, or fair market value, when investing in a businesses’ equity. Consequently, plan trustees and fiduciaries must determine, in good faith, the fair market value. These ESOP valuation assertions are then scrutinized by the IRS, the ESOP trustees, and the Department of Labor. As a result of all these unique issues, an appropriate ESOP valuation must be well documented, unbiased, and supportable.

In addition to the generally accepted consider­ations that apply to any business or stock valuation, the following valuation analyst considerations may make the ESOP transaction block of stock different from an otherwise identical block of stock:

  1. The level of value to apply in the employer stock valuation
  2. The contractual rights and privileges relat­ed to the ESOP-owned stock
  3. How the ESOP purchase of the employer stock will be financed

Harwell Valuation Advisors has the expertise necessary to value your ESOP in compliance with ERISA (DOL) and IRS regulations.