Determining a stock’s fair market value is critical in establishing and maintaining an Employee Stock Option Plan (ESOP) and is necessary to satisfy relevant IRS and Department of Labor (ERISA) requirements. An ESOP trustee also needs an accurate estimate of value to meet fiduciary responsibilities. To value the stock of a closely held company, VRC performs valuations for the initial ESOP transaction as well as valuation updates on an annual basis thereafter.

The types of ESOPs VRC works with includes:

  • Leveraged and unleveraged ESOP
  • Controlling and non-controlling ESOP
  • Early stage ESOP
  • Mature ESOP

The Three Types of ESOP Valuations

Before a firm dedicates time and money to the process of establishing an ESOP, a preliminary valuation will provide management and shareholders with an approximate indication of company value and compares the ESOP with alternatives available to shareholders.

ERISA regulations permit an ESOP security transaction only if such transactions perform at fair market value. The comprehensive valuation 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. Typically, the transaction includes a fairness opinion.

IRC Section 401(a)(28)(c) mandates annual valuation of an ESOP by an independent business appraiser.  ESOPs also 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 updates annually. An annual update becomes less time consuming and less costly than the initial valuation since our staff is familiar with the company and its financial data.