How does the "put option" in an ESOP affect share value?

Some appraisers argue that the put option in an ESOP reduces or eliminates the marketability discount; others argue it depends on the plan's proven ability to repurchase shares; still others say it depends on whether the contributions to the ESOP needed to repurchase shares increase or decrease what the company would otherwise spend on benefit plans; while some appraisers contend that the put option is not the same thing as a liquid market and should provide only a small reduction in the marketability discount.

The expert consensus is that the put option itself does not create a market unless the company shows it has (or can contribute to the ESOP) the funds to satisfy the put. If that is the case, however, the commitment of these funds to a non-productive purpose should reduce the company's value to the extent that they constitute more than what would have been contributed to employee benefits plans if the ESOP were not in place. Even then, some marketability discount should remain, because the put option is a restricted right to sell shares, subject to all the rules, delays, and limits of the ESOP distribution formula. Not to take this approach, we believe, means the company will overpay for the stock, impeding growth and harming the interests of future employee-owners.

For more details, see The ESOP Repurchase Obligation Handbook.

Link to this FAQ Topic: ESOP Valuation