Spring 2020


Thought Leadership in Employee Stock Ownership Plan Employer Stock Valuations

Editors for This Issue: Kyle J. Wishing and Scott R. Miller

ESOP Installation Thought Leadership

Introduction to ESOPs for Business Owners
Emily Rickard, Esq., and Erin Turley, Esq.
All private company business owners eventually have to address the issue of ownership transition. For business owners of private companies, viable opportunities to liquidate their business interests are often (1) limited and/or (2) suboptimal. Many business owners have some level of familiarity with the employee stock ownership plan (“ESOP”) structure. They may have heard of ESOP sponsor companies through the local or national media, from a trusted adviser, or from a friend who works for an ESOP sponsor company. For many business owners, the ESOP concept can sound either (1) too good to be true or (2) too complicated and burdensome to implement. This discussion addresses questions that business owners typically have related to an ESOP. The answers to these questions may allow these business owners to make an informed decision regarding their business ownership interests.

Best Practices Discussion:
Employee Stock Ownership Plan Financial Feasibility Analysis: Financial Considerations for Shareholders
Robert F. Reilly, CPA
The owners of a private company who are looking for an exit strategy may consider the sale of all (or part) of that company to an employee stock ownership plan (“ESOP”). Such an exit strategy may be particularly attractive to baby boomer private company owners who are seeking retirement and liquidity and who would prefer to see their loyal employees retain a stake in the company ownership. This discussion summarizes the factors that such private company owners should consider—and the feasibility analysis that their financial advisers should perform—to assess whether a sale of the private company stock to an ESOP makes sense as an ownership transition strategy.

ESOP Implementation Considerations: A Leveraged ESOP versus a Nonleveraged ESOP
Ben R. Duffy
An employee stock ownership plan (“ESOP”) is a qualified retirement plan that allows employees to hold equity in the sponsor company that employs them. There are various strategies that may be considered when the sponsor company forms an ESOP. One important structural decision regarding the ESOP formation is whether the ESOP will be leveraged or nonleveraged. This discussion compares the leveraged ESOP structure and the nonleveraged ESOP structure.

ESOP Administrative and Valuation Thought Leadership

Synthetic Equity Plans for ESOP Sponsor Companies
Scott R. Miller and Lerry A. Suarez
Synthetic equity compensation practices—such as phantom stock plans and stock appreciation rights (“SARs”) plans—are often used by employee stock ownership plan (“ESOP”) sponsor companies to help retain and incentivize the sponsor company’s key employees. These plans have become popular compliments to the ESOP sponsor company, and they offer additional compensation flexibility for the ESOP sponsor company. This discussion addresses (1) the definition of both phantom stock and SARs, (2) the development of an executive compensation plan, (3) the implementation of an executive compensation plan, and (4) the procedure for how phantom stock plans and SARs may be considered when valuing an ESOP sponsor company.

Financial Statement Normalization Adjustments for ESOP Sponsor Company Valuations
Charles A. Wilhoite, CPA, and Tia R. Hutton Normalizing financial statements is the procedure for removing the impact that nonoperating assets and liabilities and nonrecurring or unusual income and expense items exert on the “normal”—or continuing—financial results of a company. Such a procedure is performed in order to establish a level of normal operations, and related operating results, that reasonably can be relied on to develop the valuation of an ESOP sponsor company.

Thought Leadership Discussion:
Valuation Treatment of the Repurchase Obligation Liability
Kyle J. Wishing
There are certain valuation aspects that are unique to employee stock ownership plan (“ESOP”) sponsor company valuation engagements. The “ESOP” repurchase obligation is one of those aspects. There is a diversity of practice in the valuation profession as to how to treat the repurchase obligation for sponsor company valuations performed for ESOP administration purposes. There are several alternatives that may be appropriate depending on the facts and circumstances of the assignment, and the analyst’s interpretation of the fair market value standard of value for ESOP administration engagements. This discussion provides a hypothetical ESOP sponsor company valuation to illustrate the alternative valuation treatments for the repurchase obligation on the sponsor company share price conclusion.

The Fiduciary Process for the Annual Update of the ESOP Share Value
Frank “Chip” Brown, CPA
This discussion provides an overview from the trustee’s perspective of the process for periodic sponsor company valuation for ESOP administration purposes. This overview lists criteria that a trustee typically considers in (1) selecting a valuation adviser, (2) reviewing the sponsor company valuation report, and (3) establishing the fair market value of the ESOP-owned shares for administration purposes.

ERISA Litigation Thought Leadership

Pizzella v. Vinoskey: A Costly Lesson to Learn
Lisa H. Tran
In the 2019 Pizzella v. Vinoskey judicial decision, the United States District Court found that the employee stock ownership plan (“ESOP”) fiduciaries of Sentry Equipment Erectors, Inc., did not act with prudence and that they violated their fiduciary duties. The fiduciaries failed to further investigate the inconsistent assumptions applied in the valuation of the sponsor company stock that they relied on for the ESOP to purchase stock from the sponsor company owner. The District Court held that the ESOP fiduciaries were liable for $6,502,500 in damages because they knowingly participated in a prohibited transaction that caused the ESOP to pay more than adequate consideration for the sponsor company stock.

Sponsor Company Sale Transaction Thought Leadership

Fairness from a Financial Point of View: Financial Advice to the ESOP Trustee in a Sponsor Company Sale Transaction
Terry G. Whitehead, CPA
When confronted with a potential transaction, an Employee Stock Ownership Plan (ESOP) is represented by a trustee who typically retains the services of an independent financial adviser. The role of the financial adviser may involve providing a fairness opinion to answer the question of whether the transaction is fair from a financial point of view to the ESOP. In answering this question, the financial adviser may address certain specific elements of the transaction in addition to applying generally accepted valuation methods to develop a reasonable estimate of fair market value.