C A V Employee Stock


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C A V Employee Stock

  1. 1. Employee Stock Ownership Plans Basics of ESOP Stock Valuation 21 st Annual Ohio Employee Ownership Conference Fairlawn, OH April 20, 2007 Richard A. Schlueter, ASA [email_address] C OM S TOCK V ALUATION A DVISORS  1 Levee Way, Suite 3109  Newport, KY 41071  Phone: (859) 957-2300  C A V
  2. 2. Defining the Appraisal Assignment <ul><li>Assess the purpose of the valuation </li></ul><ul><li>Identify the interest being valued </li></ul><ul><li>Identify the characteristics of interest </li></ul><ul><li>Select an appropriate standard of value </li></ul><ul><li>Identify appropriate level of value </li></ul><ul><li>Determine the date of the valuation </li></ul>
  3. 3. Purpose for ESOP Valuation <ul><li>ESOP Feasibility </li></ul><ul><li>ESOP Transaction </li></ul><ul><li>ESOP Plan Administration </li></ul><ul><li>Review of Appraisal </li></ul>
  4. 4. Interest Being Valued <ul><li>Invested Capital or Enterprise Value </li></ul><ul><li>Equity Interest in a Company </li></ul><ul><li>Stock Options, Warrants or Synthetic Equity </li></ul><ul><li>Specific Tangible or Intangible Assets of the Company </li></ul>
  5. 5. Interest Being Valued Current Assets Fixed Assets 1. Tangible fixed assets 2. Intangible fixed assets Payables & ST Accruals Short & Long Term Interest- Bearing Debt Shareholder Equity Invested Capital
  6. 6. Characteristics of Interest <ul><li>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. </li></ul><ul><li>ESOP securities take the following forms: </li></ul><ul><ul><li>Common Stock </li></ul></ul><ul><ul><li>Super Common Stock </li></ul></ul><ul><ul><li>Convertible Preferred Stock </li></ul></ul>
  7. 7. Standard of Value - Fair Market Value <ul><li>“ 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.” </li></ul><ul><li>Assumes a transaction of the ownership interest has occurred </li></ul><ul><li>Hypothetical parties </li></ul><ul><li>Parties willing and able to complete the transaction </li></ul><ul><li>As of a specific valuation date </li></ul><ul><li>Value in cash or equivalent </li></ul>
  8. 8. Levels of Value Total Equity Value (Controlling Shareholder) Financial Buyer of a Company Non-Marketable Minority Interest Value Non-Controlling Shareholder of a Private Company Marketable Minority Interest Value Publicly Traded Equivalent Value Discount for Lack of Marketability Discount for Lack of Control Control Premium
  9. 9. <ul><li>An ESOP that buys greater than 50% of the stock may pay a “control premium”. </li></ul><ul><li>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. </li></ul><ul><li>The ESOP should have “voting control” and “control in fact” in order to justify the control premium. </li></ul><ul><li>Degrees of control exist based on rights under state and federal law. </li></ul>Control vs. Minority Ownership
  10. 10. Marketability for ESOPs <ul><li>Marketability Discount, as defined by the ASA, is an amount or percentage deducted from an equity interest to reflect lack of marketability </li></ul><ul><li>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. </li></ul><ul><li>Discounts impacted by: </li></ul><ul><ul><li>Level of control </li></ul></ul><ul><ul><li>Ability of company to redeem stock </li></ul></ul><ul><ul><li>Extent of pre-funding of repurchase obligation </li></ul></ul><ul><ul><li>Policy regarding immediate redemption versus payout using a note with up to a 5-year term. </li></ul></ul>
  11. 11. Valuation Date <ul><li>Valuations must be prepared as of the date of purchases or sales of stock involving transactions with parties at interest. </li></ul><ul><li>Annual (or more frequent) valuations are required for plan administration purposes. </li></ul>
  12. 12. Other ESOP Financial Concepts <ul><li>Adequacy of Consideration </li></ul><ul><ul><li>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. </li></ul></ul><ul><li>Financial Fairness </li></ul><ul><ul><li>Absolute Fairness - The ESOP may pay no more than fair market value when it buys the stock. </li></ul></ul><ul><ul><li>Relative Fairness - The ESOP must receive terms that are fair in relation to the terms given to other investors. </li></ul></ul>
  13. 13. Qualifications of the Appraiser <ul><li>Experience & Expertise </li></ul><ul><li>Independence of Appraiser </li></ul><ul><ul><li>Appraiser reports to ESOP Trustee </li></ul></ul><ul><ul><li>Appraiser represents the interests of the ESOP </li></ul></ul><ul><li>Defensibility </li></ul><ul><li>Timeliness </li></ul><ul><li>Adherence to Valuation Standards </li></ul>
  14. 14. Appraisal Standards <ul><li>Uniform Standards of Professional Appraisal Practice </li></ul><ul><li>IRS Revenue Ruling 59-60 </li></ul><ul><li>Proposed regulations on Adequacy of Consideration by U.S. Department of Labor </li></ul><ul><li>Requirement of professional business appraisal organizations like ASA, NACVA, IBA, AICPA </li></ul>
  15. 15. Valuation Basics <ul><li>Nature of business and history of enterprise </li></ul><ul><li>Economic and industry outlook </li></ul><ul><li>Book value of stock </li></ul><ul><li>Financial condition of business </li></ul><ul><li>Earnings capacity of company </li></ul><ul><li>Capacity to pay dividends </li></ul>
  16. 16. <ul><li>Goodwill or other intangible value of the enterprise </li></ul><ul><li>Recent sales of stock, the price, and size of blocks sold </li></ul><ul><li>Market price and book value of publicly traded stock of corporations engaged in a similar line of business </li></ul>Valuation Basics Source: Revenue Ruling 59-60
  17. 17. Valuation Process <ul><li>Issue engagement letter </li></ul><ul><li>Gather financial information and other documents </li></ul><ul><li>Prepare financial analyses </li></ul><ul><li>Tour facilities and interview management </li></ul><ul><li>Prepare valuation analyses </li></ul><ul><li>Issue a draft report containing preliminary findings and supporting documentation </li></ul><ul><li>Submit draft for review by Trustee </li></ul><ul><li>Present valuation to Trustee and/or ESOP Committee and answer questions </li></ul><ul><li>Issue final valuation report and opinion letter </li></ul>
  18. 18. Valuation Report Content <ul><li>Valuation Opinion Letter </li></ul><ul><li>Executive Summary </li></ul><ul><li>Company Profile </li></ul><ul><li>Economic and Industry Outlook </li></ul><ul><li>Financial Performance and Adjustments </li></ul><ul><li>Identification of Guideline Companies </li></ul><ul><li>Determination of Discount or Capitalization Rates </li></ul><ul><li>Application of Valuation Methods </li></ul><ul><li>Control/Minority and Marketability </li></ul><ul><li>Reconciliation and Conclusion on Value </li></ul>
  19. 19. Pre vs. Post-Transaction Value <ul><li>Depending on the structure of the ESOP transaction, the value of the stock may decrease if leverage is used in the transaction. </li></ul><ul><li>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. </li></ul>
  20. 20. Thank You Any Questions?