Spring 2009



Editor for This Issue: Malcolm ("Mike") R. Hartman

ESOP Transaction Insights

Thought Leadership Article:

Indiana's ESOP Initiative
Alexander L. Mounts, Esq., and Lisa A. Durham, Esq.
We recently had the privilege and honor of working with Willamette Management Associates and other professionals on the first employee stock ownership plan (ESOP) transaction to close under the new Indiana ESOP Initiative (IEI) program. Richard Mourdock, Indiana State Treasurer, created the IEI (1) to promote and encourage the formation of ESOPs in Indiana companies and (2) to incentivize and reward Hoosier workers to increase employee productivity. Mourdock is often quoted as saying, "One of the best reasons to help Indiana companies become employee-owned is that no group of employee- owners have ever, ever, ever, ever moved their company to Mexico or China!" This discussion will first describe Treasurer Mourdock's background, as well as the background of the IEI. This discussion will then focus on the IEI participation requirements. This discussion will present a brief question and answer dialogue with Treasurer Mourdock regarding ESOP formations. And, finally, this discussion will describe the application of the IEI to Radian Research, Inc. Radian Research, Inc., was the first employer corporation to implement an ESOP under this IEI program.

The ESOP Feasibility Analysis for a Potential ESOP Formation
Malcolm ("Mike") R. Hartman
Employee stock ownership transactions always require significant preliminary analysis to determine whether or not a transaction will meet the needs of the selling shareholder(s) and whether it will work for the company and its management team. Sometimes much of this work is performed by a financial adviser who represents the selling shareholders. Sometimes the work is accomplished by the financial advisory firm that will be providing the valuation and fairness opinions to an ESOP trustee. This article discusses who needs to be involved in the feasibility study, a recommended process for accomplishing this important preliminary work, and the contents of a feasibility study.

ESOP Employer Stock Purchase Fairness Opinions
Malcolm ("Mike") R. Hartman
ESOPs continue to be an attractive vehicle to allow closely held business owners to sell the company stock to the company employees. Today, almost all ESOP trustees require that their financial adviser prepare a fairness opinion related to the ESOP employer stock purchase transaction. This fairness opinion should state that the employer stock purchase transaction is fair to the ESOP from a financial point of view. This discussion presents a procedure checklist that may be considered by the financial adviser (1) in conducting the employer corporation stock valuation or (2) in performing any ESOP-related financial advisory due diligence analysis-such as the fairness opinion.

ESOP Valuation Insights

Repurchase Obligation Impact on the Sponsor Company Share Value
Kelly ("Bucky") R. Wright
The valuation procedures related to the sponsor company stock held by an employee stock ownership plan (ESOP) have evolved in recent years. The biggest single change is the emphasis being placed on the future share repurchase obligation of the sponsor company. This discussion describes (1) the need for the valuation analyst's consideration of this sponsor company obligation and (2) the impact on the employer corporation stock valuation of the alternative ways that the shares of the departing ESOP participants are handled.

ESOP Valuation and Financial Advisory Services Bibliography
Charlene M. Blalock
This bibliography lists ESOP-related professional journal articles, books and textbooks, previous Insights articles, and useful web sites. These reference materials should be of interest to valuation analysts and to independent financial advisers who practice in the ESOP area. And, these reference materials should also be of interest to ESOP trustees, to ESOP lenders, and to other ESOP professional advisers (such as lawyers and accountants).

The Market Approach- ESOP Employer Stock Valuations During Economic Turmoil
Charles A. Wilhoite and Bobbie J. Jenkins
The market approach is a generally accepted business valuation and security analysis approach. In many cases, it is particularly relevant to the fair market value valuation of (1) an ESOP sponsor company and (2) the employer corporation shares owned by the plan participants. There are generally accepted practices and procedures with respect to the application of the market approach, particularly within the context of an ESOP employer stock valuation. However, it is challenging for even the experienced valuation analyst to perform a market approach valuation analysis during periods of severe economic turmoil. This discussion identifies some of the factors that the valuation analyst should consider in the application of the market approach in an employer stock valuation during such periods.

ESOP Administration Insights

Best Practices Article:

Employee Tax Basis Considerations Related to Employer Corporation Stock Distributions
Robert F. Reilly and Robert P. Schweihs
When an ESOP employee/participant receives a stock distribution of employer corporation stock, the employee has to keep track of (1) the stock's fair market value per share, (2) the stock's tax basis per share, and (3) the total amount of net unrealized appreciation related to the stock. The ESOP sponsor company, with or without the assistance of a third-party administrator, should provide the employee/participant with the necessary information to make these calculations. This discussion summarizes some of the practical procedures related to tracking the employee tax basis tax information with respect to employer corporation stock distributions. These procedures affect both the ESOP sponsor company and the ESOP employee/participant.

Should Your ESOP Company Elect S Corporation Status?
Kevin Long
The larger the percentage of the sponsor company stock that is owned by the ESOP, the more compelling it is for the employer corporation to consider S corporation status. However, there are a number of issues that are outside of the employee benefits arena which may affect this taxpayer status consideration. This discussion summarizes those concerns. They fall into two categories (1) S corporation tax rules and (2) corporate/structural issues.

Uncertainty Describes 2008 Election Results Impact on ESOPs
J. Michael Keeling
This discussion is an edited version of The ESOP Association President J. Michael Keeling's speech to the attendees of the 2008 Las Vegas Conference and Tradeshow held November 13 and 14, 2008. This discussion focused on the legislative outlook for ESOP companies in hard times.

Selling an ESOP- Owned Employer Corporation
Michael McGinley
When a sponsor company establishes an employee stock ownership plan (ESOP), the initial plan is usually (1) that the ESOP will stay in place forever and (2) that all of the employees will enjoy the fruits of their labors. This benefit occurs when the sponsor company shares in the employee accounts are put back to the sponsor company at the time of the employee retirement. Sometimes, however, ESOP employer corporations are sold. The existence of an ESOP does add a measure of complication to a sale of the sponsor company. However, with the right advisers, a successful sponsor company sale transaction can be completed for the benefit of all parties. This discussion presents an overview of the process, issues, special considerations, roles, and responsibilities of each party, and distribution rollover options in selling an ESOP-owned employer corporation.

Market Factors for ESOPs in the Coming Years
Corey Rosen
ESOPs today face a future full of both promise and question marks. It would be safe to assume that these conditions will continue to exist in the next few years. This state of flux makes predicting the future of ESOPs very challenging. But there are trends in the economy and the marketplace that offer indications of where ESOPs may be heading in the coming years. This discussion presents thoughts on how certain market and certain business characteristics may give us some insights as to what is on the horizon for ESOPs.

Valuation Insights

Expert Advice Article:

Employee Stock Option Value in a Falling Market
Achaessa James
Stock option plans have long been an important tool for company managers and boards to attract and retain the very best management team possible. Incentive stock options (ISOs) are the most common form of such plans. In the current period of economic uncertainty, however, such plans may provide little incentive because the exercise price is often far higher than current market prices. This discussion summarizes the implications of the repricing of the stock options and the consequences of doing so.

How Patent Vulnerability Impacts Valuation
David Wanetick
This discussion presents practical advice with regard to the factors that affect the value of patents and related technology intangible assets. In particular, this discussion summarizes many of the valuation-related risk factors related to (1) patent validity and (2) patent licenses and license royalty rates. And, this discussion explains how such risk factors may affect the intellectual property valuation.

Regulatory Issues Related to Tax-Exempt Health Care Organization Valuations
Robert F. Reilly
Valuation analysts are often called on to perform fair market value appraisals related to health care organizations. This is particularly the case when a tax- exempt entity is entering into a transaction with a for-profit entity. And, such transactions could include either (1) a purchase of property or (2) a purchase of services. In either case, the tax-exempt entity is concerned that it (1) does not pay more than fair market value for the property or services it purchases or (2) does not receive less than fair market value for the property or services that it sells. This is because tax-exempt entities-and particularly tax-exempt health care organizations-are subject to various federal and state regulations regarding such issues. Accordingly, valuation analysts that serve tax-exempt health care organizations should be at least generally familiar with these regulatory issues. This discussion summarizes the regulatory compliance issues related to tax-exempt health care organization valuations.