ESOP Valuation - Part 2

Vetting an ESOP Appraiser

We touched upon an important point in our last article:  the importance of choosing a qualified ESOP appraiser.  We have heard it said that any appraiser worth his/her weight should be able to perform an ESOP valuation because the methodologies and approaches are the same regardless of who holds the employer stock.  This perspective betrays a somewhat naive view about the nuanced world of ESOPs.  In this article, we will elaborate on the subject of how to choose an ESOP appraiser carefully and provide a helpful downloadable checklist.

As mentioned in the last article, the most important criterion in choosing a qualified appraiser is to select one that routinely renders ESOP valuation opinions.  Let's face it, ESOP issues are complex and intricate, due in no small part to the ever-present shadow of regulatory bodies such as the Internal Revenue Service and the Department of Labor (DOL) and the exacting guidelines to which one must adhere in order to be in compliance with ERISA law, a set of laws passed by Congress in the early 1970s that contains the superstructure of retirement plans such as ESOPs.

It is also important to retain an appraiser who has the requisite experience, education, professional accreditations, and professional association memberships.  One helpful way to ascertain if an appraiser has the necessary experience with ESOP valuations is to simply interview the candidate or request that the candidate reply in writing to a set of questions such as:

-    How long has your firm been performing valuations?
-    What percentage of your firm's revenue is derived from ESOP valuation services?
-    How many ESOP valuations are performed by your firm each year?
-    Describe any industry-specific expertise or client concentration.
-    How is your firm organized to provide ESOP valuation services?
-    Describe your valuation process (e.g., valuation methodologies commonly employed, weighting approaches).
-    Describe your due diligence process for both annual updates and transactions.
-    Do you subscribe to any research databases or external resources?
-    Provide an overview of the individuals assigned to ESOP valuations, including their level of experience, credentials, memberships, and years valuing ESOP companies.
-    What is the average number of ESOP feasibility studies, fairness opinions, and solvency opinions performed annually by your firm?
-    Have you or your firm ever been sued or has your work ever been the subject of any litigation?
-    Is your work performed in conformity with applicable appraisal standards such as those from the American Society of Appraisers (ASA) or the Uniform Standards of Professional Appraisal Practice (USPAP)?
-    Do you speak or write on valuation topics? If so, on which topics have you spoken? Who was your audience?

The preceding considerations should go a long way toward steering you to the right appraiser for your company or client.  Of all of the outside professionals you may call upon to help navigate the ESOP waters, the choice of a qualified appraiser is certainly one of the most important decisions you will make.  After all, the DOL has recently stated publicly that ESOPs are currently an investigative priority for the department, specifically citing a rather extensive list of issues that it will be scrutinizing such as whether management received excess compensation and whether transaction valuations were too highly valued.  Many of the issues listed by the DOL as "investigation interests" intersect the valuation realm of ESOP compliance.

Follow Us

View Acclaro's's LinkedIn profile