Analyzing Financial Projections as Part of the ESOP Fiduciary Process | Appraisal Review Practice Aid for ESOP Trustees

In recent years there has been increasing concern among ESOP sponsors and professional advisors (trustees, TPAs, business appraisers, legal counsel) regarding the scrutiny of the DOL, the Employee Benefits Security Administration (“EBSA”), and the Internal Revenue Service (“IRS”). These entities (and agencies thereof) are tasked with ensuring that ESOPs comply with the Employee Retirement Income Security Act (“ERISA”) as well as with various provisions of the federal income tax code concerning qualified retirement plans (including ESOPs). Citing concerns for poor quality and inconsistency in business appraisals, the DOL has sought in recent years to expand the meaning of “fiduciary” under ERISA to include business appraisers. In this article, Timothy R. Lee focuses on the use of financial projections in ESOP valuations. The use (or misuse) of financial projections is often the most direct cause of over- or under-valuation in ESOPs.

Why You Should Create an Employee Stock Ownership Plan

When facing a business transition, one option owners have is selling internally to employees through an Employee Stock Ownership Plan (ESOP). This article discusses the basics of executing an ESOP and the benefits an ESOP offers, such as ownership and management succession, tax incentives, and rewarding employees.

Fairness Opinions in ESOP Transactions

In our experience as financial advisors to ESOP trustee, and as an ESOP-owned company, every ESOP situation usually has unique circumstances that require specific assessment.

Mercer Capital’s ESOP Valuation Process

The establishment of an Employee Stock Ownership Plan (“ESOP”) is a complex process that involves a variety of analyses, one of which is an appraisal of the Company’s shares that will be held by the plan. The process of a business valuation is often new and challenging to first-time clients, so we thought it would be helpful to provide elaboration on Mercer Capital’s valuation process to make the experience less intimidating.

Changing ESOP Appraisers: Why It Might Be Necessary and How to Accomplish It

ESOP valuation is an increasing concern for Trustees and sponsor companies as many ESOPs have matured financially, demographically, and strategically. Given these and other evolving complexities, it is sometimes necessary for ESOP Trustees and the Boards of ESOP companies to change their business valuation advisor.

The 1042 Rollover

For many business owners, the investment in their company is their most significant asset. Shareholders of closely held businesses, particularly those on the crest of the baby boom wave, are rigorously searching for exit plans to diversify their portfolios and to plan for the next stage of life.

How ESOPs Work

ESOPs are a recognized exit planning tool for business owners, as well as a vehicle for employees to own stock in their employer company. However, most business owners and their advisors are unfamiliar with how an ESOP works.

ESOP Appraisal for a Cyclical Business

The Employee Stock Ownership (ESOP) appraisal utilizes the same tools and techniques of any fair market value appraisal assignment, but with an added emphasis on analyst expertise in understanding the market, the economy, and the underlying business model for the subject company.

ESOP Ownership in S Corporations

Many of Mercer Capital’s clients have recognized the value of employee ownership in terms of employee loyalty and motivation as well as the numerous tax advantages to the business and maintain an Employee Stock Ownership Plan (“ESOP”). The most interesting development in the ESOP arena, however, is the increasing number of S corporations establishing ESOPs and ESOP-owned C corporations electing to convert to subchapter S status.

The DOL And ESOP Oversight Responsibility

Mercer Capital has been engaged periodically by the U.S. Department of Labor (DOL) to review an historical ESOP transaction and offer our comments regarding the appropriateness of valuation and procedural prudence. While these are two different and distinct areas, the DOL is interested in pursuing both. Violations of procedural prudence can influence the business valuation process and its determination of adequate consideration for ESOP shares.

ESOPs: The Basics and the Benefits

An ESOP is an employee benefit plan designed with enough flexibility to be used to motivate employees through equity ownership. Therefore, according to theory, ESOPs implicitly enhance productivity and profitability and create a market for stock. This enhances shareholder liquidity and provides a vehicle for the transfer of ownership, which can assist in the transition from an owner/management group to an employee-owned management team.

Valuation Requirements & Fiduciary Responsibilities for Trustees

The duties of trustees for qualified employee benefit plans which invest in employer securities are becoming increasingly important. In light of current trends toward more complex ESOP matters trustees need to clearly understand their responsibilities and liabilities.

Simple Truths About ESOP Appraisals

After years of experience listening to and working with clients and their financial advisors, as well as preparing hundreds of appraisal reports, we have learned a few general and often overlooked simple truths about ESOP appraisals. We share the following six observations in hopes that they will broaden your perspective of business valuation and possibly provide you with some “tips” to assess future appraisals you may review.

The Use of the Independent Financial Advisor in ESOP Transactions

The complexity of transactions involving the use of Employee Stock Ownership Plans (ESOPs) and the rising sensitivity to fiduciary responsibilities has led many plan fiduciaries to seek the advice of independent financial advisors when important transactions occur. This article describes the role and qualifications of the financial advisor, the primary factors in the development of financial advisory opinions, and some practical issues related to the decision by the trustee to hire an advisor.