Transcript Document
Employee Stock
Ownership Plans
Basics of ESOP Stock Valuation
21st Annual Ohio Employee Ownership Conference
Fairlawn, OH
April 20, 2007
Richard A. Schlueter, ASA
[email protected]
CVA
COMSTOCK VALUATION ADVISORS
1 Levee Way, Suite 3109 Newport, KY 41071 Phone: (859) 957-2300
Defining the Appraisal Assignment
Assess the purpose of the valuation
Identify the interest being valued
Identify the characteristics of interest
Select an appropriate standard of value
Identify appropriate level of value
Determine the date of the valuation
Purpose for ESOP Valuation
ESOP Feasibility
ESOP Transaction
ESOP Plan Administration
Review of Appraisal
Interest Being Valued
Invested Capital or Enterprise Value
Equity Interest in a Company
Stock Options, Warrants or Synthetic Equity
Specific Tangible or Intangible Assets of the
Company
Interest Being Valued
Current
Assets
Payables &
ST Accruals
Fixed Assets
Short &
Long Term
InterestBearing Debt
1. Tangible
fixed assets
2. Intangible
fixed assets
Shareholder
Equity
Characteristics of Interest
Equity interest purchased by an ESOP must
be the highest class of stock or convertible
into the highest class of stock issued by the
company.
ESOP securities take the following forms:
Common
Stock
Super Common Stock
Convertible Preferred Stock
Standard of Value - Fair Market Value
“The price at which the company’s stock would
change hands between a willing buyer and a willing
seller, neither being under any compulsion to buy or
sell and both having reasonable knowledge of all
relevant facts.”
Assumes a transaction of the ownership interest
has occurred
Hypothetical parties
Parties willing and able to complete the transaction
As of a specific valuation date
Value in cash or equivalent
Levels of Value
Total Equity Value (Controlling Shareholder)
Financial Buyer of a Company
Control Premium
Discount for Lack of Control
Marketable Minority Interest Value
Publicly Traded Equivalent Value
Discount for Lack of Marketability
Non-Marketable Minority Interest Value
Non-Controlling Shareholder of a Private Company
Control vs. Minority Ownership
An ESOP that buys greater than 50% of the stock
may pay a “control premium”.
An ESOP can buy less than 50% of the stock and
may be able to pay a control premium if the ESOP
will acquire control in a “reasonable” period of
time.
The ESOP should have “voting control” and
“control in fact” in order to justify the control
premium.
Degrees of control exist based on rights under
state and federal law.
Marketability for ESOPs
Marketability Discount, as defined by the ASA, is
an amount or percentage deducted from an equity
interest to reflect lack of marketability
Under ERISA, there is a “put” right back to the
company for non-publicly traded stock that creates
a market for the ESOP’s shares.
Discounts impacted by:
Level of control
Ability of company to redeem stock
Extent of pre-funding of repurchase obligation
Policy regarding immediate redemption versus payout
using a note with up to a 5-year term.
Valuation Date
Valuations must be prepared as of the date
of purchases or sales of stock involving
transactions with parties at interest.
Annual (or more frequent) valuations are
required for plan administration purposes.
Other ESOP Financial Concepts
Adequacy of Consideration
The fair market value of the security, as
determined in good faith by the trustee or
named fiduciary of the plan, in accordance with
regulations issued by the Department of Labor.
Financial Fairness
Absolute Fairness - The ESOP may pay no more
than fair market value when it buys the stock.
Relative Fairness - The ESOP must receive
terms that are fair in relation to the terms given
to other investors.
Qualifications of the Appraiser
Experience & Expertise
Independence of Appraiser
Appraiser
reports to ESOP Trustee
Appraiser represents the interests of the ESOP
Defensibility
Timeliness
Adherence to Valuation Standards
Appraisal Standards
Uniform Standards of Professional Appraisal
Practice
IRS Revenue Ruling 59-60
Proposed regulations on Adequacy of
Consideration by U.S. Department of Labor
Requirement of professional business
appraisal organizations like ASA, NACVA,
IBA, AICPA
Valuation Basics
Nature of business and history of enterprise
Economic and industry outlook
Book value of stock
Financial condition of business
Earnings capacity of company
Capacity to pay dividends
Valuation Basics
Goodwill or other intangible value of the
enterprise
Recent sales of stock, the price, and size of
blocks sold
Market price and book value of publicly
traded stock of corporations engaged in a
similar line of business
Source: Revenue Ruling 59-60
Valuation Process
Issue engagement letter
Gather financial information and other documents
Prepare financial analyses
Tour facilities and interview management
Prepare valuation analyses
Issue a draft report containing preliminary findings and
supporting documentation
Submit draft for review by Trustee
Present valuation to Trustee and/or ESOP Committee and
answer questions
Issue final valuation report and opinion letter
Valuation Report Content
Valuation Opinion Letter
Executive Summary
Company Profile
Economic and Industry Outlook
Financial Performance and Adjustments
Identification of Guideline Companies
Determination of Discount or Capitalization Rates
Application of Valuation Methods
Control/Minority and Marketability
Reconciliation and Conclusion on Value
Pre vs. Post-Transaction Value
Depending on the structure of the ESOP
transaction, the value of the stock may
decrease if leverage is used in the
transaction.
Dilution may be reduced through the use of
super common and convertible preferred
stock or through the substitution of ESOP
benefits for other existing benefits.
Thank You
Any Questions?