ESOP Valuation Issues
by Chip Brown, Michael J. McGinley, and Alexander L. Mounts
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Format: PDF, 40 pages
Dimensions: 8.5 x 11 inches
Edition: 1st (June 2011)
Status: Available for electronic delivery
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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:
- The evaluation of the contribution of the professional(s) to the practice is a key factor in the analysis.
- 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.
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.