Frequently Asked Questions

Employee Ownership FAQs

Common questions about employee stock ownership plans (ESOPs), employee ownership trusts (EOTs), and other forms of employee ownership, from the basics to technical topics.

This FAQ is written primarily for business owners, managers, and advisors involved in setting up or running an employee ownership plan. If you're an employee at an ESOP company looking to understand your own benefits and rights, see our articles on Working at an ESOP Company and The Rights of ESOP Participants.

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What is the difference between a valuation and a fairness opinion?

An ESOP valuation assesses the value of the shares an ESOP is purchasing based on a model that assumes a hypothetical willing financial (not synergistic) buyer). It produces a specific number. A fairness opinion determines the fairness of a transaction to participants in the transaction. When an ESOP buys shares from a non-ESOP owner, trustees can rely either on a valuation or a fairness opinion. The fairness opinion will produce a fairly narrow range that would be deemed fair for participants. The trustee, the seller, and the board would then negotiate a final price within the range.

Fairness opinions are required in two scenarios aside from a simple purchase form an owner. Where there are multiple owners, and especially where there are different classes of stock or different groups are putting up different kinds of investments (one group cash, one group borrowing money, an ESOP borrowing money the company repays, employees putting up wage or benefit concessions, etc.), fairness to the ESOP must be determined. If one investor puts in $1,000,000 in cash and the ESOP puts in $1,000,000 with borrowed money to be repaid out of future earnings, what is a fair price for both to pay? These and similar situations call for a professional financial advisor to opine on the fairness of the transaction, but the ESOP trustee must ultimately make the decision.

If there is an offer for the ESOP company the trustee is considering, then a fairness opinion is necessary to determine if the deal is acceptable. The trustee has to determine if ESOP participants would be better off in the mid- to long- term if the deal were not accepted and the ESOP continued. The trustee has to compare the offer and what employees might do with that money relative to the projected increase in the value of ESOP shares as well as contributions and reallocations of stock to ESOP participants that are in excess of what normal retirement contributions in companies are. If the ESOP participants would do better not selling under these calculations then the trustee would normally not deem the offer to be sufficient.

For more details, see The Inside Fiduciary’s Guide to ESOP Valuation.

Link to this FAQ Topic: ESOP Valuation