managing the esop valuation process :: nceo webinar
DESCRIPTION
This summer 2009 presentation was part of an NCEO-sponsored webinar on the topic of "Managing the ESOP Valuation Process."TRANSCRIPT
Managing the ESOP Valuation Process
Presented by
Timothy R. Lee, ASAMERCER CAPITAL
5860 Ridgeway Center Parkway, Suite 400Memphis, TN 38120
901.685.2120 » [email protected]
Timothy R. Lee, ASA
Senior Vice PresidentBoard Member901.685.2120
Employee owned 2
Defining the Engagement
Client Name
Business Name
Type of Entity
State of Incorporation
Principal Business Location
Business Interest Under Consideration
Standard of Value
Premise of Value
Level of Value
Effective Date
Purpose & Intended Use
Scope of Work
Assignment Definition
Timothy R. Lee, ASA
Senior Vice PresidentBoard Member901.685.2120
Employee owned 3
Assignment Definition
Client Name The ESOP Trustee
(Internal vs. External)Business Name
Type of Entity
State of Incorporation
Principal Business Location
Business Interest Under Consideration see Level of Value
Standard of Value Fair Market Value
(Adequate Consideration)
Premise of Value Going Concern
Level of Value Control or Nonmarketable Minority
Effective Date Installation Date
Significant Corporate Event
Annual Plan Year Date
Significant Participant Election
Purpose & Intended Use ESOP Feasibility
ESOP Installation
Plan Year Valuation
ESOP Termination / Company SaleScope of Work Appraisal
Fairness Opinion
Timothy R. Lee, ASA
Senior Vice PresidentBoard Member901.685.2120
Employee owned 4
Appraisal Review & Appraiser Critique
Basic Valuation Process– Engagement Definition– Information Collection & Review– Due Diligence– Valuation Analysis– Draft Reporting– Value Reconciliation
• Absolute versus Relative Value – Draft Review
• Trustee should recognize the ESOP company• Trustee should understand the methodology and
treatments in the appraisal• Appraiser should clearly communicate primary
valuation considerations and value drivers
– Finalize Report
Timothy R. Lee, ASA
Senior Vice PresidentBoard Member901.685.2120
Employee owned 5
How To Address Changes in Draft Reports
Appraisers are interested in the credibility of their reports. Draft review & reconciliation processes are critical to quality control and the ultimate conclusion of value
Factual– Information correctness & completeness– Full disclosure
Logical– Consistency throughout methodology & report
Judgmental– Critical adjustments (ESOP contributions, compensation,
non-recurring events, etc.)– Critical assumptions (such as risk treatment, growth
assessment, averaging, etc.)– Informed judgment, common sense, and reasonableness
Documentation of Changes
Timothy R. Lee, ASA
Senior Vice PresidentBoard Member901.685.2120
Employee owned 6
Repurchase Obligation
ESOP trustees of mature plans should have periodic repurchase obligation studies performed and appraisers should inquire about any emerging liability issues
Appraisal treatments of repurchase obligations may include:– Adjustment of ESOP contribution expense
– “Capitalization” of ESOP contribution expense
– Consideration of ESOP ownership percentage (control or minority)
– Marketability discounts
Timothy R. Lee, ASA
Senior Vice PresidentBoard Member901.685.2120
Employee owned 7
ESOP Sustainability
Repairing an ESOP is difficult. Common problems that threaten ESOP sustainability:– Poor company performance– Overvaluation– Lack of will to fix the problem
Transaction Size– Don’t take too big a bite from the apple– Careful feasibility analysis
Plan design & repurchase obligation– Lump sum vs. deferred payment– Have an RO Study sooner rather than later
ESOP Trustee Instructions– Level of value (minority to control)
Timothy R. Lee, ASA
Senior Vice PresidentBoard Member901.685.2120
Employee owned 8
Timothy R. Lee, ASA
901.322.9740 :: [email protected]
Timothy R. Lee joined Mercer Capital in 1994 and currently serves as a senior vice president and is a member of the firm’s board of directors.
Tim leads the firm’s Valuation Service Group and provides valuation and corporate advisory services for purposes including mergers and acquisitions, employee stock ownership plans, profit sharing plans, estate and gift tax planning and compliance matters, limited and general partnerships, corporate planning and reorganizations.
Tim has extensive experience in working with both sellers and buyers in merger and acquisition advisory engagements. He has assisted clients through all phases of the sales process, from conducting strategic alternatives analyses to determine if selling is indeed the best option, to structuring, negotiating, and closing transactions. In addition, Tim provides litigation support in cases involving dissenting shareholder rights, marital dissolution, tax matters, and other shareholder conflicts.
Tim has broad industry experience providing corporate valuation and investment banking services to hundreds of companies in an array of industries. Noteworthy industry experience includes, but is not limited to, beer wholesalers, computer hardware, computer software and consulting, construction, food services, general and specialty contracting, distribution companies, financial services, food processing and retail, heavy equipment, manufacturing, technology companies, trucking & transportation, and wood processing.
Timothy R. Lee, ASA
Senior Vice PresidentBoard Member901.685.2120
Employee owned 9
Questions
Timothy R. Lee, ASA
MERCER CAPITAL
5860 Ridgeway Center Parkway, Suite 400
Memphis, TN 38120
901.685.2120 » [email protected]