Business Valuations (ESOPs)

More than 6,000 companies have ESOPs with approximately 9% in the banking industry, the highest percentage of any sector. ESOPs offer many benefits, including attracting and retaining employees, providing business continuity, and offering tax advantages for all parties. Valuations are central to the employee ownership process. Banks are responsible for engaging an independent appraiser of the ESOP in order to provide useful information to its employees and help the bank meet federal regulatory requirements. The valuation is performed annually on the plan sponsor which determines the market price for employee-owned shares.

Wilary Winn is a nationally recognized expert in valuation of financial institutions. We combine a thorough understanding of regulatory requirements pertaining to ESOP valuations with the knowledge and experience necessary to value the equity in an enterprise. Our valuations meet the requirements of the Employee Retirement Income Security Act of 1974 (ERISA) overseen by the Department of Labor (DOL) and follow the factors outlined by the Internal Revenue Service (IRS) in Revenue Ruling 59-60 (RR 59-60) in estimating the fair market value of a private business. We recognize and apply different methods for valuation, including income, market, and asset-based approaches. We align our methodology with the nature of the business being valued.

We begin by analyzing the eight fundamental factors described in RR 59-60. With this context in mind, we generally employ three methods to estimate the overall value of the entity: discounted cash flow, guideline public company, and guideline transaction. An asset-based approach is also considered in instances where a physical or financial asset is a major component of the total value, or the subject entity is distressed or planning to cease operations. We also consider past transactions of the institution’s stock, although limited weight is placed on these prices if few trades have occurred.

In order to determine the institution’s value on a minority basis, we apply a discount for lack of control to select approaches, where applicable, based on observed deal premiums in the marketplace. Given capital stock of closely held corporations is not publicly traded, it is also necessary to consider a discount for lack of marketability. In our valuations, we primarily rely on restricted stock studies, long-term equity anticipation securities (LEAPS) studies, the Mandelbaum factors noted in Mandelbaum v. Commissioner, and a protective put analysis.

The final step is to divide the minority, non-marketable value by the number of outstanding shares. Ultimately, we arrive at a per share fair market value of equity on a minority, non-marketable basis. We provide this service for most clients on an annual basis.