What Is an ESOP Valuation?

An ESOP valuation is the determination of the worth of the shares in a company's "employee stock ownership plan." Such a valuation is done by a third party not associated with the company and is required in the United States by both the Internal Revenue Service and the Department of Labor. The key to an ESOP valuation is the determination of the fair market value of the stock. This can be accomplished by using mathematical calculations to determine the value of the investment as well as by using the expertise of the evaluator in terms of how stock should be judged.

Many companies look for ways to reward their loyal employees, and one way of accomplishing this is through an employee stock ownership program, or ESOP. In an ESOP, the people who work for their company are rewarded with stock in the company, which essentially grants them shares of ownership. This can beneficial to business owners as well in terms of tax write-offs and estate planning. Any business owner who initiates such a program should realize that an ESOP valuation must be performed.

There are various financial professionals who are qualified to perform an ESOP valuation when a company needs one. In addition to their qualifications in terms of their ability to perform the evaluation, these professionals must also have complete objectivity when doing their work. They must have no connection with the company whose plan is under review, to ensure that their ultimate valuation will be completely unbiased.

When performing an ESOP valuation, the main requirement is determining how much shares issued to employees are worth. The concept of fair market value is crucial to this job. Fair market value can be roughly defined as the price that would be paid for the shares on the open market after negotiations between two independent parties. In this ideal situation, both parties would be knowledgeable and would be operating to find an equilibrium between buying and selling price.

Since the idea of fair market value is so integral to an ESOP valuation, the appraiser must have an accurate method of finding this value. One such method is to try and establish how much the present value of the stock is when projected future earnings are considered along with the overall market's projected rate of increase in that same time span. Other less tangible factors may also be taken into account by the appraiser, who can use his experience with past valuations to determine the value of shares in the current situation.