All posts by Chris Best

The Independent Review of an ESOP Valuation Report

When is it wise to have an independent review of a business valuation report?  This blog will consider one common reason for requesting an independent review of a business valuation report.

Under the Employee Retirement Income Security Act (ERISA), an ESOP’s named fiduciary is charged with the responsibility of determining whether the consideration paid in a transaction represents adequate consideration.  The named fiduciary also has this same responsibility with respect to the annual update valuation.  In the case of a private company, adequate consideration is fair market value as determined in good faith by the named fiduciary in accordance with the provisions of the plan and the regulations of the Department of Labor.

Fiduciaries can fulfill this responsibility by undertaking the valuation themselves.  However, if the independent fiduciary does not have the experience or expertise to make the type of valuation, they may use an independent financial advisor or business appraiser to help them meet these responsibilities.  However, even if an independent financial advisor or business appraiser is used, the fiduciary is still responsible for determining adequate consideration by critically reviewing and evaluating the appraiser’s valuation report and approving it.

In Donovan v. Cunningham (716 F.2d 1455 (1983)), the Court commented that:

An independent appraisal is not a magic wand that fiduciaries may simply wave over a transaction to ensure that their responsibilities are fulfilled. It is a tool and, like all tools, is useful if used properly.  To use an independent appraisal properly, ERISA fiduciaries need not become experts in the valuation of closely held stock – they are entitled to rely on the expertise of others.  [italics and bolding added here and below]

The Court recognized that ERISA fiduciaries may not be experts in business valuations nor are they required to become an expert in business valuations.

In Howard v. Shay, the Court commented:

The fiduciary is required to make an honest, objective effort to read the valuation, understand it, and question the methods and assumptions that do not make sense.  If after a careful review of the valuation and a discussion with the expert, there are still uncertainties, the fiduciary should have a second firm review the valuation.

In the Couterier settlement (the Settlement), the Department of Labor (DOL) commented on the standards expected of fiduciaries in connection with an ESOP valuation.

The Settlement requires the Attorney in the Couterier matter to spell out, in a written communication, the ESOP fiduciaries’ duties in reviewing the independent valuation report.  One of these duties is to:

Determine that the appraiser’s opinion letter is justified by reading, and understanding the opinion and any supporting documents in the independent appraiser’s opinion letter, including identifying, questioning, and testing assumptions that underlie the opinion, verify that conclusions in the opinion a, the Court commented that the data, analysis, and conclusions are internally consistent, and if necessary, retain additional expert support to aid understanding and addressing any problems with the valuation report and other deemed necessary reports and/or advice and supporting documents.

Although the settlement in Couterier does not establish precedent for other legal disputes, it is important to take notice of the standards expected of fiduciaries with respect to ESOP valuation reports – an ESOP fiduciary is held to a standard of care applicable to all ERISA plan fiduciaries known as a “prudent expert”, the highest fiduciary standard under the law.

Most third-party trustees have a working knowledge of valuation theory and application and are capable to competently review the valuation report.

However, many internal trustees do not have a working knowledge of valuation theory and application and are not able to discern whether or not an ESOP valuation report is credible and can be relied upon.  They just simply do not have the requisite training and background to review an ESOP valuation report.

As a result of the DOL’s requirement to retain an expert to assist in reviewing the valuation report, some trustees are hiring an independent valuation firm to review the valuation report


How to Identify Prospective ESOP Situations for Ownership Transition


In today’s corporate and tax environment, successful ownership transition can sometimes be perplexing.  While many alternatives are available to accomplish this ownership transition objective, only a few alternatives are appropriate for any given set of circumstances.  The options typically include an initial public offering, a management buyout, a recapitalization, a sale to a third party, a sale to an employee stock ownership plan (ESOP), a joint venture, and others.

This blog post will discuss in detail one option, the leveraged ESOP, which is a powerful tool for accomplishing a successful transfer of ownership.  The benefits of an ESOP ownership transition include deferring capital gains taxes to the selling stockholder, the tax deductibility of principal payments on ESOP debt, low interest financing on certain transactions, possible improved employee productivity, and the opportunity to maintain operational control through employee ownership.

The following discussion summarizes the attributes a prospective ESOP company should have in order to best utilize the advantages of an ESOP for succession planning.

Diversification Desired by Owner

Diversification is important for all investors, but is particularly crucial for stockholders nearing retirement age.  For business owners whose major personal asset is their stock in a closely held company, an ESOP provides a valuable diversification vehicle.  The proceeds from the sale of stock to an ESOP can be reinvested in a diversified portfolio of securities with favorable tax benefits (discussed later), providing lower risk for an equivalent expected return on the owner’s investment in the current business.

Continuity of Business Ownership

ESOPs can provide continuity of ownership and control since the ESOP trustee is typically a passive, financial stockholder whose objective is closely aligned with the success of the business.  Therefore, if the stockholder sells less than a 50% ownership interest, then effective operational control remains with those best qualified to manage the business.  Also, owners can reward past and future employee efforts through employee ownership.

Alignment of Employee/Stockholder Interests

Because an ESOP provides for the allocation of stock.  Employees who are owners are more likely to be concerned with the business’s profitability and productivity, which are typically stockholder concerns, than are employees who are not owners.  Research has shown that ESOP companies are more efficient, productive, and profitable than their non-ESOP competitors.

Consistent Management

A strong management team should be in place to handle succession if the owner/manager is leaving.  Some financial institutions may require employment contracts or non-compete agreements with key executives in leveraged ESOP transactions.

Size of the Business

Businesses with larger revenues and/or substantial assets are often better candidates for leveraged ESOPs because larger businesses can attract more favorable financing and typically have a lower cost of debt.  In addition, transaction costs as a percentage of proceeds are relatively lower for larger businesses.

Manufacturing companies have a larger investment in fixed assets that can be used to collateralize loans.  Service businesses should have earnings and cash flows that are strong enough to support an ESOP loan.  To enhance the ESOP debt collateral, selling stockholders may have to pledge a portion of the transaction proceeds to the bank, although the pledge can be limited in both amount and duration.

The most efficient minimum size of an ESOP loan is typically $2 to $5 million, with a $1 million transaction generally considered the smallest transaction size for an ESOP.  For smaller transactions to be successfully completed, the transaction structure should remain simple in order to reduce transaction costs.

Debt-Carrying Capacity

The business must be capable of generating adequate cash flow to satisfy the debt service requirements of the ESOP and any other interest-bearing debt.  Businesses with lower debt-to-equity ratios can take on more leverage in the form of ESOP financing.  Therefore, it is generally more difficult to finance an ESOP in capital-intensive businesses that typically have larger debt loads.  The business with low debt-to-equity ratios should have established a significant banking relationship with a financial institution in order to facilitate the ESOP financing.  While the existing debt level may be a constraint in the leverage of the ESOP, this drawback may be minimized because the ESOP-related income tax benefits and possible improved employee productivity can enhance the business’s debt-carrying capacity.

Seller’s Low Tax Basis in Company Stock

Individual owners that sell to an ESOP and reinvest the proceeds in qualified replacement securities (i.e., any domestic corporate stocks or bonds) can defer recognition of a capital gain if the ESOP owns at least 30% of the employer company immediately after the sale.  The deferred capital gains tax benefits are especially valuable to owners who would otherwise recognize a significant capital gain because of to a low tax basis in their stock.

Large Payroll Base

In cases where a significant percentage of a business is sold to an ESOP, a large payroll base allows the business to repay the principal on the ESOP debt with tax-deductible contributions.  However, there is a limit on the amount of employer contributions that are tax deductible.  If this limit is expected to be exceeded, the preferred securities can be sold to the ESOP.  Because of the tax deductibility of dividends on ESOP-owned preferred stock, the ESOP debt principal payments remain fully deductible.


This blog post is designed to assist those considering a leveraged ESOP acquisition with the appropriate strategy to pursue, based on all of the facts and circumstances surrounding each specific ownership transaction situation.  While there are many circumstances when an ESOP fits the financial and cultural aspects of a business’s operations, it is important for business owners to keep in mind all the implications of becoming an ESOP-owned company.

Please contact Acclaro if you have any questions regarding the valuation of employer securities for ESOP purposes.


Acclaro Team Members Present at NCEO Conference

Acclaro Team Members Present at NCEO Conference

Acclaro Valuation Advisors is an leader in business interest and closely-held business valuation services. The company specializes in initial ESOP valuation as well as annual ESOP valuation reports; due to their experience in the field, Acclaro ESOP valuation advisors are sought speakers on employee ownership topics.

In April 2013, members of the Acclaro team attended and made presentations at the annual National Center for Employee Ownership conference. Aaron Pryor moderated a roundtable discussion at an experts’ luncheon, and Chris Best served as a co-presenter of a presentation on ESOP exit planning.

We are proud of our members’ involvement in the ESOP community and look forward to continued engagement in ESOP education and innovation.


ESOP Engagements by Acclaro Valuation Advisors

ESOP Engagements by Acclaro Valuation Advisors

Acclaro Valuation Advisors, an independent valuation firm that specializes in ESOP company annual stock valuation services among many others, has inaugurated the year 2013 by giving joint presentations at the Heckerling Institute on Estate Planning, an annual conference on estate planning held in Orlando, Fla., in mid-January. The presentations introduced and discussed the ESOP as an attractive alternative estate planning tool for business owners.

On Feb. 7, Acclaro advisor Robert Hicks will speak at a seminar organized by The National Center for Employee Ownership in Phoenix, Arizona. His contribution will include a discussion of various ways to maximize the incentivizing potential of management compensation, as part of a day-long workshop on best practices for S-corp ESOPs.

Acclaro and ESOP Marketplace are proud to start the year with continuing contributions to both the theory and practice of ESOPs.


Acclaro Valuation Advisor Aaron Pryor Listed on ESOPMarketplace

Acclaro Valuation Advisor Aaron Pryor Listed on ESOPMarketplace

Aaron Pryor, expert ESOP valuation advisor and associate at industry leading valuation firm Acclaro, now has a professional listing on ESOP Marketplace. We are happy to feature Mr. Pryor on our site, as part of our attempt to create a highly quality-controlled listings of expert ESOP advisors.

Mr. Pryor’s expertise encompasses a variety of ESOP fields, such as ESOP feasibility study and valuation, consideration and fairness opinions, and exit planning.


Robert Hicks, Jr.: ESOP Valuation Specialist with Acclaro

Robert Hicks, Jr.: ESOP Valuation Specialist with Acclaro

Valuation is a crucial step in the ESOP process, being necessary to determine accurate company share price and ESOP dividends. ESOP Marketplace is happy to add an expert valuation firm – Acclaro Valuation Advisors – to its company listings.

Robert Hicks is one the firm’s advisors with an individual listing featured on our site. Mr Hicks, a managing director at Acclaro, is a Certified Public Accountant who has provided valuation and consulting for privately owned businesses for over 20 years.

His overall experience in the financial services industry spans 35 years; in the employee ownership field, he’s an expert in ESOP feasibility study planning and execution, advisory services pertaining to management compensation, fairness, initial and annual ESOP valuations, fiduciary matters, financing and problem-solving.


Glenn Ball, Acclaro Valuation Advisor, Listed on ESOP Marketplace

Glenn Ball, Acclaro Valuation Advisor, Listed on ESOP Marketplace

Glenn Ball is one of the ESOP experts at Acclaro Valuation Advisors we’re proud to feature in a personal listing on our site. Educated in political science and accounting, Mr. Ball has, since 2000, advised privately owned businesses on a range of issues, such as valuation, taxes and business accounting.

Mr. Ball’s expertise as an accountant and valuation advisor stands out, given that he is one of few appraisers who have worked extensively in the ESOP trustee field.

Any business looking for an experienced ESOP valuation advisor with a comprehensive and multi-faceted approach will benefit from Mr. Ball’s advice, and we’re happy to feature him on ESOP Marketplace.


Acclaro ESOP Advisor Chris Best Joins ESOP Marketplace

Acclaro Valuation Advisors is a market leader and a respected authority in the field of ESOP valuation. ESOP Marketplace is excited to represent a distinguished firm like Acclaro, and is happy to count a number of great Acclaro advisors among the site’s individual advisor listings.

One of the advisors with a personal listing on the Marketplace is Chris Best, Acclaro’s Managing Director and an expert in valuation.

Mr. Best has advised privately held businesses on issues pertaining to valuation, such as reviewing ESOP valuation reports for compliance and credibility. He is a CPA with decades of experience, whose credentials include Accredited in Business Valuation (ABV), Accredited Senior Appraiser (ASA), Master Certified Business Appraiser (MCBA), and Accredited in Business Appraisal Review (ABAR).

Mr. Best has prepared over a thousand valuations, and has also developed and taught courses on appraisal, valuation and other advanced business topics.


ESOP Valuation Advisor Acclaro Establishes Chicago Office

We have some big news from Acclaro and its managing director and ESOP advisor Chris Best. Acclaro has recently announced that they’re opening a new branch in the Chicago marketing area. This new office will be in addition to their location in Phoenix, Arizona. Chris Best had the following to say about the new office, “The new office in Chicago will better enable Acclaro to serve the business valuation and exit planning needs of our Midwest clients.”

The new Chicago branch will be headed by Glenn Ball, who has has provided tax, accounting, and business valuation services to privately held businesses since 2000. He is an an Accredited Senior Appraiser (ASA) and a Certified Public Accountant (CPA). He also holds the Accredited in Business Valuation (ABV) credential.

This is big news for ESOPs because Acclaro is a leading authority on the valuation of businesses that sponsor ESOPs. They always strive to provide their clients with independent, technically sound, well-researched, and defensible valuation reports. And they’re just the type of company you can form important connections with through the ESOP Marketplace.