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Managing the ESOP Valuation Process :: NCEO Webinar
Managing the ESOP Valuation Process :: NCEO Webinar
Managing the ESOP Valuation Process :: NCEO Webinar
Managing the ESOP Valuation Process :: NCEO Webinar
Managing the ESOP Valuation Process :: NCEO Webinar
Managing the ESOP Valuation Process :: NCEO Webinar
Managing the ESOP Valuation Process :: NCEO Webinar
Managing the ESOP Valuation Process :: NCEO Webinar
Managing the ESOP Valuation Process :: NCEO Webinar
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Managing the ESOP Valuation Process :: NCEO Webinar

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This summer 2009 presentation was part of an NCEO-sponsored webinar on the topic of "Managing the ESOP Valuation Process."

This summer 2009 presentation was part of an NCEO-sponsored webinar on the topic of "Managing the ESOP Valuation Process."

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  • IF YOU START WRONG, IT’S HARD TO FIX IT! Principal Business Location :: where the business is versus where Mercer Capital or your appraiser is?
  • Information Process The phase that clients dread the most. Leverage existing sources of information that may be developed to manage the business internally. Website resources. PITCH BOOK TO GIVE TO APPRAISER. Communication with appraiser about information needs.
  • Understand everything in their appraisal so they can understand what is factual and what is a logical problem If you find your appraisal results in something that is logically inconsistent and factually wrong, have the draft reworked Only in that fashion can you assess critical assumptions and other judgmental parts of the report and how they might affect value DOCUMENTATION OF CHANGES If I issue draft and they do not bring many things that are factually wrong (sometimes we receive factually incorrect information) – those changes are OCB 2 nd set of changes = Judgmental. Sometimes information not complete re items that affect risk and growth. Upon complete info, changes might be needed. Appraisers should communicate to client why the change was made and document that in their file. Appraisers should not be there to “blow in the wind” because you don’t think the number is right. A good appraiser invites the critical review of their draft to make sure they deliver a report that the client can understand and can, in fact, duplicate calculations, and they can clearly see the critical assumptions in the analysis and can read about those assumptions in the report.
  • Capitalization – if the earnings stream has charged to it an expense for some or all of the contribution, the valuation implicitly recognizes and quantifies the repurchase obligation.
  • Business owners look for an exit plan. When one doesn’t present itself externally, they look for one internally There are lots of ways that people encounter the ESOP concept Tax advantage for exit Tax advantage to pay for it If people conduct a transaction and put an ESOP in, because of their age or evolving motivation in business, maybe their company is declining. Results in growing pains for up and comers. So, one of the most important things to do to sustain the ESOP is what you would do to sustain your company – pay attention. Look for ways to maximize revenues and minimize expenses. If you do that, and your valuation makes sense, repurchase obligation and therefore long-term ESOP sustainability should be relatively easy. Don’t find yourself behind the eight ball waiting for your plan to mature before getting a handle on potential repurchase obligation
  • Transcript

    • 1.  
    • 2. Defining the Engagement Assignment Definition Scope of Work Purpose & Intended Use Effective Date Level of Value Premise of Value Standard of Value Business Interest Under Consideration Principal Business Location State of Incorporation Type of Entity Business Name Client Name
    • 3. Assignment Definition Appraisal Fairness Opinion Scope of Work ESOP Feasibility ESOP Installation Plan Year Valuation ESOP Termination / Company Sale Purpose & Intended Use Installation Date Significant Corporate Event Annual Plan Year Date Significant Participant Election Effective Date Control or Nonmarketable Minority Level of Value Going Concern Premise of Value Fair Market Value (Adequate Consideration) Standard of Value see Level of Value Business Interest Under Consideration Principal Business Location State of Incorporation Type of Entity Business Name The ESOP Trustee (Internal vs. External) Client Name
    • 4. Appraisal Review & Appraiser Critique
      • Basic Valuation Process
        • Engagement Definition
        • Information Collection & Review
        • Due Diligence
        • Valuation Analysis
        • Draft Reporting
        • Value Reconciliation
          • Absolute versus Relative Value
        • Draft Review
          • Trustee should recognize the ESOP company
          • Trustee should understand the methodology and treatments in the appraisal
          • Appraiser should clearly communicate primary valuation considerations and value drivers
        • Finalize Report
    • 5. How To Address Changes in Draft Reports
      • Appraisers are interested in the credibility of their reports. Draft review & reconciliation processes are critical to quality control and the ultimate conclusion of value
      • Factual
        • Information correctness & completeness
        • Full disclosure
      • Logical
        • Consistency throughout methodology & report
      • Judgmental
        • Critical adjustments (ESOP contributions, compensation, non-recurring events, etc.)
        • Critical assumptions (such as risk treatment, growth assessment, averaging, etc.)
        • Informed judgment, common sense, and reasonableness
      • Documentation of Changes
    • 6. Repurchase Obligation
      • ESOP trustees of mature plans should have periodic repurchase obligation studies performed and appraisers should inquire about any emerging liability issues
      • Appraisal treatments of repurchase obligations may include:
        • Adjustment of ESOP contribution expense
        • “Capitalization” of ESOP contribution expense
        • Consideration of ESOP ownership percentage (control or minority)
        • Marketability discounts
    • 7. ESOP Sustainability
      • Repairing an ESOP is difficult. Common problems that threaten ESOP sustainability:
        • Poor company performance
        • Overvaluation
        • Lack of will to fix the problem
      • Transaction Size
        • Don’t take too big a bite from the apple
        • Careful feasibility analysis
      • Plan design & repurchase obligation
        • Lump sum vs. deferred payment
        • Have an RO Study sooner rather than later
      • ESOP Trustee Instructions
        • Level of value (minority to control)
    • 8. Timothy R. Lee, ASA
      • 901.322.9740 :: leet@mercercapital.com
      • Timothy R. Lee joined Mercer Capital in 1994 and currently serves as a senior vice president and is a member of the firm’s board of directors.
      • Tim leads the firm’s Valuation Service Group and provides valuation and corporate advisory services for purposes including mergers and acquisitions, employee stock ownership plans, profit sharing plans, estate and gift tax planning and compliance matters, limited and general partnerships, corporate planning and reorganizations.
      • Tim has extensive experience in working with both sellers and buyers in merger and acquisition advisory engagements. He has assisted clients through all phases of the sales process, from conducting strategic alternatives analyses to determine if selling is indeed the best option, to structuring, negotiating, and closing transactions. In addition, Tim provides litigation support in cases involving dissenting shareholder rights, marital dissolution, tax matters, and other shareholder conflicts.
      • Tim has broad industry experience providing corporate valuation and investment banking services to hundreds of companies in an array of industries. Noteworthy industry experience includes, but is not limited to, beer wholesalers, computer hardware, computer software and consulting, construction, food services, general and specialty contracting, distribution companies, financial services, food processing and retail, heavy equipment, manufacturing, technology companies, trucking & transportation, and wood processing.
    • 9. Questions Timothy R. Lee, ASA MERCER CAPITAL 5860 Ridgeway Center Parkway, Suite 400 Memphis, TN 38120 901.685.2120 » [email_address]

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