Who Determines the Value of Company Stock in the ESOP?
Valuation of company stock in the ESOP must be made by an independent appraiser annually, and any time the ESOP purchases company stock from the company or an employee, officer, director, or 10% or greater shareholder.
The DOL and IRS have issued guidance on the factors that must be taken into account when appraising a company, and who should do the valuation. Basically, a qualified appraiser must (i) hold himself/herself out to the public as an appraiser or perform appraisals on a regular basis, and be qualified to make appraisals of the type of property being appraised; and (ii) be independent with respect to the company and other parties to the ESOP transaction.
The credibility the IRS or DOL attaches to the appraisers conclusion of fair market value will be greatly influenced by their assessment of the expertise demonstrated by the individual or firm doing the appraisal. The same can be said for the independence of the appraiser. In order to satisfy the independence criteria, the valuation cannot be done by:
- The taxpayer who maintains the ESOP
- A party to the transaction in which the ESOP acquired the property
- An employee of the taxpayer who maintains the ESOP
- An individual or firm regularly used by the taxpayer maintaining the ESOP who does not perform a majority of his or her appraisals for entities other than the taxpayer maintaining the ESOP
What Costs Are Involved in Establishing and Maintaining an ESOP?
Costs are a function of the complexity of the transaction. If owners take the time to get a better understanding of ESOPs, initial costs can be reduced.
Ongoing ESOP administrative expenses are similar to most profit sharing plans, with the exception of the annual valuation update needed to value company stock held in the ESOP.
Are ESOPs Really More Complex Than Other Ways to Sell a Business?
This table from The National Center for Employee Ownership (NCEO) compares the complexity, risks, and flexibility of selling a closely held company to an ESOP compared to selling to a third party. It is based on the advice of a number of experts in the field. Each transaction, however, will bring its own special issues, so the descriptions in this table are for typical transactions and may not apply in every situation.
Can an S corporation set up an ESOP?
Yes. Effective January 1, 1998 it became advantageous for an ESOP to be a shareholder of an S corporation under the federal tax laws. To the extent that the S corporation is owned by an ESOP, no federal income taxes on corporate income are payable by either the shareholder or the company.
Business Succession Planning & ESOPs
An employee stock ownership plan (ESOP) may make sense for some dealers and other aftermarket retailers looking to build a succession plan they can control while protecting wealth, diversifying assets and deferring taxes. Is an ESOP right for your company? Use our ESOP self-assessment tool to find out.