Employee Stock Ownership Plans (ESOPs)

Appraisal Economics has extensive experience valuing employee stock ownership plans (ESOPs).  We perform ESOP valuations for various purposes, including:

  • Financial reporting, principally under ASC 718, ASC 505, and IFRS2
  • Federal income taxes
  • Management planning

Employee stock ownership plans are qualified defined contribution retirement plans that allow employers to provide their employees with shares of company stock, often at no cost to employees. Through a fund set up on behalf of employees, management can contribute cash to the fund to buy shares, contribute shares directly to the fund, or borrow on behalf of the fund and use the proceeds to purchase shares. ESOPs are unique in that they are the only type of qualified employee benefit plan that has the ability to incur debt.  ESOPs must have an appointed trustee, who has a fiduciary duty to provide oversight of the valuation of the ESOP. The trustee is responsible for obtaining periodic appraisals of the company’s stock in the ESOP and making decisions on behalf of the company’s employees, who are the ESOP’s beneficiaries.

Companies use ESOPs to assist their employees with retirement planning, improve productivity and morale among employees, and provide existing shareholders with a way to gradually transfer their interests. Many ESOPs have time-based vesting conditions that require a grantee to fulfill a service requirement (that is, remain employed at the company) for their ownership interest to vest. The award may vest completely on a single future date (“cliff” vesting) or in several tranches on multiple future dates (“ratable” or “graded” vesting). These vesting conditions affect the value of the plan.

Employees generally receive the vested portion of their accounts upon termination, retirement, or death. Upon one of these events, the ESOP will purchase an employee’s shares for cash. Employees may begin diversifying their account once certain conditions are met, allowing them to convert a portion of their shares into cash for investment elsewhere. As ESOP contributions are tax-deductible, ESOPs must be valued annually for tax filing purposes.

ASC 718 requires that valuation models for ESOPs and other forms of stock-based compensation must: (i) be applied in a matter consistent with the fair value measurement objective and other requirements of ASC 718; (ii) be based on established principles of financial economic theory as generally applied in that field; and (iii) reflect all substantive characteristics of the grant instrument.

Appraisal Economics can help with ESOP appraisals by determining the business enterprise value and allocating that value among the capital structure to determine the fair value of the shares purchased by the ESOP. This information is fully supported by a detailed appraisal report suitable for review by independent auditors, the Securities and Exchange Commission, and the Internal Revenue Service.

In addition to ESOP valuations, we also offer other valuation services for other types of performance awards and stock-based compensation, including long-term incentive plans (LTIPs), restricted stock units (RSUs), outperformance plans (OPPs), profits units, and other performance awards with market conditions. These services include pre-award planning and “what if” analyses of alternative plan designs and future scenarios, award computations, valuations and award computations under plan modifications, and many other services.

Appraisal Economics has an experienced team of highly qualified professionals with decades of valuation experience. We provide a full range of valuation services, including purchase price allocations, solvency opinions, portfolio valuations, and business valuations. To learn more about how our team of experts can meet your employee stock ownership plan and other valuation needs, please Contact Us.