ESOP Valuation White Paper

By Glenn Ball, CPA/ABV, ASA

I recently contributed to the writing of a white paper about ESOP valuations titled, "Valuation and Transactional Issues Associated With Employee Stock Ownership Plans," published by the American Institute of Certified Public Accountants (AICPA).  The authors of the paper were charged with providing aESOP Valuation white paper concise overview of an ESOP transaction and the maintenance of an ESOP on an ongoing basis.  In particular, we were asked to provide practical and regulatory insights into what goes into a successful ESOP installation.

An early section in the white paper describes common tax attributes for all corporations which sponsor an ESOP and then attempts to delineate differences between a C corporation and an S corporation when it comes to the tax treatment of ESOPs.
The white paper spends quite a bit of time outlining the roles of the various players in the ESOP world, from the U.S. Department of Labor (DOL) and the Internal Revenue Service (IRS) to professional ESOP advisors, such as ESOP trustees, valuation firms, ERISA attorneys, third-party administrators, and CPA firms.  In addition, a section of the white paper is dedicated to explaining the somewhat complex relationship between the ESOP trustee and the valuation firm that the trustee has hired to perform the valuation. For example, many newcomers to the ESOP valuation world are surprised to find out that the ESOP trustee, not the valuation firm, actually sets the stock price.

A particularly relevant section of the white paper, in my opinion, is the one that explains the proper manner in which the valuation expert is to communicate the result of the valuation to ESOP participants.  This function is not as easy as it seems on the surface and must be approached with care and prudence. The ESOP trustee typically will coach the appraiser on the do's and don'ts of effective communication of an ESOP valuation.

The latter portion of the white paper deals with miscellaneous issues of ESOP valuations including applicable standards required by regulatory bodies such as the AICPA, DOL, and IRS; a description of a "Bring Forward Letter" and how it is used in ESOP transactions; control versus minority ownership issues; the issuance of financial fairness opinions; and executive compensation issues and how critical compensation issues are in the successful installation of an ESOP.

I believe that the white paper offers something for everyone, from those who are brand new to ESOPs to the seasoned ESOP veteran. The paper is available for download to AICPA members only on the AICPA website.  However, Acclaro Valuation Advisors has been given permission by the AICPA to post it on its website for public download.  We sincerely appreciate this permission.  Happy reading and please don't hesitate to contact me or the other contributing authors if you have any questions regarding the ESOP valuation and transaction issues discussed in the white paper.


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