What is the effect of other equity investors on an ESOP valuation?

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So-called &#34;multi-investor&#34; ESOP transactions raise the difficult issue of &#34;equity allocation.&#34; The problem can be illustrated by an example. Imagine that a group of employees wants to buy their company. A lender is willing to loan them up to 70% of the asset value of the firm, provided they agree to wage and benefit concessions. This will provide 60% of the asking price. The lender also requires that management put up some of its own money because it wants employees to have something &#34;on the line.&#34; That will provide another 10% of the price. The remaining 30% will be obtained from an equity partner, perhaps another company or private investors who are willing to put up cash.The valuation problem is to assess how much each investor should get. The simple view would be &#34;dollar for dollar.&#34; The ESOP is putting up 60%, so it should get 60%, while the managers get 10%, and the investors get 30%. The cash investors will argue, however, that they are putting their assets at risk; the ESOP will repay its debt out of future earnings, and the participants in the plan will not be liable if there are losses. The employees argue that they are taking concessions, and that the ESOP provides important tax benefits as well.In the 1980s, some leveraged ESOPs were put together in which equity investors got a different class of stock that provided them with much more ownership for fewer dollars relative to the ESOP purchase. The Department of Labor took legal action to challenge some of these, arguing for the &#34;dollar for dollar&#34; approach. That position made multi-investor ESOPs virtually difficult to put together; investors wanted more for an investment with those kinds of risks.In recent years, these kinds of deals are structured with warrants. In the most typical transaction, investors would loan money to the company to purchase shares for the ESOP. The loan would be junior to other debt and carry a higher rate of interest. In order to receive part of their return and equity, the investors would take part of their return as warrants. Warrants provide the investor with the right to purchase shares at the transaction price for a defined number of years into the future. They operate much in the same way stock options do. Trustees and valuation firms can work to determine at the rate of blended return on these investments is fair to the ESOP.For more details, see Selling to an ESOP and Financing the Deal and the ESOP Pre-Feasibility Toolkit.ID #366&#34;        #N/A        #N/A