Valuations for ESOPs

Business valuation for an Employee Stock Ownership Plan ("ESOP") is the process of determining the fair market value of a company's stock. It requires an independent appraiser to comply with strict regulations, and it establishes the share price for employee distributions, transactions, and ongoing plan management.

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ESOP valuations face immense scrutiny from the IRS and the Department of Labor ("DOL") under the Employee Retirement Income Security Act ("ERISA"). The valuation must reflect "adequate consideration" (fair market value) to avoid prohibited transactions.

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Upon the establishment of an ESOP trust, a business valuation of the company is performed to establish the purchase price of company shares being sold to the ESOP trust. Once the initial value of company shares has been established, an annual business valuation is performed by an independent valuation professional to establish the share price at which vested shares are repurchased from departing or retiring company employees.

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The ESOP trustee is ultimately responsible for reviewing the independent valuation professional's work, ensuring it complies with ERISA, and officially approving the opinion of fair market value.