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ESOP Valuation Issues

by Chip Brown, Michael J. McGinley, and Alexander L. Mounts

This is one of our archived publications; specialized publications that have been removed from our main publication list and are not being updated, but are are still available for purchase, although sometimes only in digital form.

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Valuation is a central issue in the employee stock ownership plan (ESOP) community, and this issue brief presents five articles on an array of matters related to valuation in an ESOP context. The first article discusses valuing stock appreciation rights (SARs) in ESOP companies. The second presents a framework for analyzing the repurchase obligation and how it affects the valuation. The third article discusses how ESOP contribution expense is treated in a valuation. The fourth discusses valuation and other issues for financial institutions that adopt ESOPs. The final article presents a case study and interview of an accounting firm that recently implemented an ESOP, and then analyzes the valuation issues that arose.

Publication Details

Format: PDF, 40 pages
Dimensions: 8.5 x 11 inches
Edition: 1st (June 2011)
Status: Available for electronic delivery

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Valuing SARs in ESOP Companies
STARS: A Framework for Analyzing and Valuing the ESOP Repurchase Obligation
Adjustments to Financial Statements for ESOP Contribution Expense
Special Considerations for Financial Institution ESOPs
Implementing an ESOP and Valuing the Shares in an Accounting Firm


From "Implementing an ESOP and Valuing the Shares in an Accounting Firm"

Some professional accounting practices are more dependent on one or a few individuals than is usually the case for most businesses. This has two primary implications for the practice valuation:
  1. The evaluation of the contribution of the professional(s) to the practice is a key factor in the analysis.
  2. In some cases, it may be important to distinguish between the elements of intangible value that are more associated with the institutional practice versus those elements that are more associated with the individual practitioner.

Many professional practices use cash-basis accounting, and it usually is necessary to adjust financial statements to an accrual basis for practice valuation purposes. However, it is noteworthy that certain comparative data for similar professional practices may be presented on a cash basis. In such a situation, the analyst may need to use cash-basis data for comparative purposes and still use accrual-basis data for other aspects of the valuation process. In the case of BPM, certain adjustments had to be made to the financial statements due to changes in accounting in the partnership versus a corporation.

A greater proportion of professional practice assets tend to be intangible assets than is the case for other types of businesses. To this extent, the values of professional practices tend to be even more dependent on earning capacity than are other businesses. If an asset-based valuation approach is used, the analyst should be well versed in the analysis and appraisal of intangible assets. In professional practices, intangible assets often derive their values primarily from their contribution to the economic income of the practice.

Professional practices are more often constrained to a limited life than are most businesses. Most businesses are regarded as having a perpetual life. While the perpetual-life valuation premise may be appropriate for larger professional practices like BPM, it is not always appropriate for smaller professional practices. This is because smaller professional practices may be con-strained by the limited professional working life of the individual practitioner(s). Professional practice valuations often rely heavily on income approach valuation methods. Accordingly, this limited life characteristic may need to be reflected in the projections underlying the income approach analyses.