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How to Choose Employee Ownership Consultants

4. Choosing an Appraiser

If your company is closely held, and for some purposes even if it is public, you should have an appraisal to determine the share value. Outside appraisals are required for ESOPs and sensible for equity compensation plans. This may be the most complex and important part of your task in putting a team together.

Note that in the ESOP context, the appraiser is hired by and reports to the trustee of the plan, not the seller or the board, although the seller or company may hire an appraiser for a preliminary valuation when evaluating the feasibility of an ESOP. Thus, if an ESOP transaction is in question, the recommendations directed to "you" below about hiring an appraiser are addressed to the ESOP trustee, and in particular an internal trustee (i.e., a company employee or committee) as opposed to an external trustee whose business it is to know these matters.

First, you want to make sure the appraiser is independent, a requirement of the law for ESOPs and desirable for broad stock option plans. There is no "bright line" definition of this term. At a minimum, the appraiser should have no other business relationship with your company. Clearly, your company's CPA is not independent, nor is your CFO. But what if your CPA is a member of a major accounting firm that has a separate appraisal division? Or your appraiser is a member of a brokerage firm that also has a lending division making you an ESOP loan or is handling the sale of exercised stock options in a broad stock option plan? Most people think that large firms like these can create sufficient separation between the units to provide independence, but you should have a compelling reason for taking this approach when there are lots of truly independent appraisers available. Some legal consultants also have affiliated appraisers who are technically not part of their firm but who get referrals from them. This is not clearly improper, but our advice at the NCEO is that it is a risk that is not worth taking and that it creates a clear conflict of interest. The point of having an independent appraisal is to avoid putting the appraiser in a situation where he or she knows that coming up with an acceptable price will win business for a related firm.

Second, you want to check qualifications, as outlined above. Appraisers have particular professional designations granted by either the American Society of Appraisers or Institute of Business Appraisers. Various designations offered by these groups indicate professionals have reviewed materials and taken tests to demonstrate their competence. You should ask if an appraiser has any such designations and what they entail. Industry-specific expertise is generally not an issue. Appraisers all have access to various databases indicating the relevant ratios and other information that are used to make appraisals for particular business areas. ESOP-specific or options-specific expertise is another matter, since both plans raise special valuation issues. In order to become familiar with these issues, appraisers should have participated extensively in professional organizations.

Third, you want to evaluate the cost of an appraisal. Fees will vary widely. In part, the variation is a function of the size and reputation of the firm. In a larger firm, your appraisal will be reviewed by one or more other people. Some firms also have proprietary databases tracking such things as how much closely held business have sold for in various industries. Naturally, you will pay more for this additional infrastructure and time. Will this result in a better or different number than using a smaller firm? There are costs and benefits either way.

Finally, you should find an appraiser whose approach is one that fits your definition of what is in the best interests of the plan. This is a complex issue. The general methods used to assess the value of a company overall do not vary dramatically from one qualified appraiser to another, but some appraisers are more aggressive in their assumptions than others. More important, the philosophy about ESOP-specific or options-specific issues varies widely.

ESOP Issues

Equity Compensation Issues

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