Employee Stock Ownership Plans

Employee Stock Ownership Plans

One of the important steps in establishing an Employee Stock Ownership Plan (ESOP) is the appraisal of the company stock held by the ESOP or Employee Stock Ownership Trust (ESOT). If the company is in the process of studying the implementation of an ESOP, a business valuation firm may be initially engaged to perform a preliminary or limited appraisal. Later, if the ESOP is established, a formal, comprehensive appraisal of the stock is prepared in accordance with the guidelines of the Employee Retirement Income Security Act (ERISA), the Department of Labor (DOL), the Internal Revenue Service (IRS) and the Uniform Standards of Professional Appraisal Practice (USPAP).

An ESOP appraisal is required:

• Upon initial acquisition of securities by the ESOP;
• At least annually after the ESOP transaction is consummated;
• Whenever there is a transaction between the ESOP and a party in interest; and
• When the ESOP sells its stock position.

An independent valuation of the company is mandatory under current law and regulations to protect the employees and support the fiduciary responsibility of the ESOP or ESOT trustees. Our qualified valuation consultants follow all of the requirements of relevant regulations set forth by the DOL, IRS Revenue Rulings and ERISA, to provide reliable third-party valuations for the establishment of the plan and for required annual updates.

ValueScope provides valuation services with complete independence. We do not offer any services related to the actual ESOP plan administration, adoption of an ESOP plan, or ongoing ESOP administrative activities.

ESOP Fundamentals

In recent years, there has been an increase in the number of owners that have revisited ESOPs as a way to convert their intangible wealth into cash. An ESOP is a type of qualified, defined benefit plan. Over time, the ESOP systematically buys all or part of the company's common stock using its own cash or borrowed funds. In turn, the sponsoring company then contributes an amount to the ESOP each year that is for their employees' future benefit.

There are two forms of an ESOP: leveraged or non-leveraged. With a non-leveraged ESOP, the company proceeds to issue new common stock and then contributes new treasury stock to the plan. The company then will eventually pay cash directly to the owners for their common stock interests.

A leveraged ESOP is a situation where the firm will borrow money from a financial institution. Often, the leveraged ESOP will also borrow funds from the company's principal owners in order to buy the company's common stock. After the leverage purchase, the stock is then placed into an escrow account and released systematically as the loan is repaid. Leveraged ESOPs can allow firms the opportunity to defer payment of some of the plan's benefits to their employees until the loan is fully repaid. In addition, loan repayments within a leveraged ESOP (principal and interest) can be tax deductible, a viable option that in itself is very appealing.

Why ValueScope?

Focusing analytics through experience means our seasoned valuation consultants provide independent valuations that meet all of the regulatory requirements set forth by the DOL, IRS Revenue Rulings and ERISA, providing clients with the legal documentation and financial assurance necessary for ESOP implementation and annual reporting requirements.