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When to Value an ESOP

February 26, 2020

By Erin Flannery, courtesy of Yeo & Yeo 

One option business owners choose for succession planning is an employee stock ownership plan (ESOP). ESOPs can empower and retain employees as well as provide tax savings, but careful consideration needs to be given to how and when these plans are valued. The value of the privately held stock is subject to standards put in place by both the Internal Revenue Service and the Department of Labor. Both organizations have employed fair market value as the standard value, otherwise known as the price the stock would trade for on the open market.

ESOPs require valuations at different times and for different reasons. A company that is considering starting an ESOP would want to have a valuation performed before they go through the steps of establishing an ESOP so they will know an approximate value of the company and can compare this option to other alternatives they are considering.

A valuation would also need to be done anytime the ESOP is engaging in a security transaction to verify that the transaction is occurring at fair market value. The IRS does not allow a company to take a deduction for an ESOP contribution unless the ESOP has received shares worth the amount of the deduction.

Finally, a valuation needs to be performed each year to determine the value of stock that is owned by employees. If a plan participant, beneficiary, or retired employee would like to sell their stock, they would sell the stock back to the trustee at the price per share during this time.

Valuations for an ESOP are different from the average valuation in that they require additional analysis and disclosures. They also must satisfy Department of Labor requirements. It is important to make sure that when engaging in these types of transactions, you are working with a valuation analyst who is aware of these additional requirements to make sure your plan is compliant.

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