How are ESOP stocks evaluated

[Guest Blowout]

How are ESOP stock evaluated? My boss who is the plan administrator said tht it is determined by the area of business that we are in (banks) and that what other banks our size are worth or sold for goes into determining our stock value. I thought it what your own bank's profits are and not what other banks are. we are a closely held company.

[RLL]

Employer stock which is not publicly traded must be valued for ESOP purposes by an independent appraiser. The appraiser will apply rules for determining "fair market value" which have been developed over many years for tax purposes and business transactions.

The financial condition and performance of the subject company are the primary factors in determining value. The appraiser often applies certain "multiples" to earnings and cash flow to determine fair market value. These multiples will generally be derived from the multiples applicable to comparable companies whose stocks are publicly traded.

I think that your boss and you are each partly correct about how stock of a closely held company is valued for ESOP purposes.

For specific information on valuation of closely held company stock for ESOP purposes, check the web sites for The ESOP Association (www.esopassociation.org) and the National Center for Employee Ownership (www.nceo.org).

[Guest asky]

The rules governing valuations for ESOP purposes are established under IRS Revenue Ruling 59-60, Proposed Department of Labor Regulations. In addition, standards of professional appraisal practice have been established by the Appraisal Foundation.

An independent appraiser must look at companies engaged in the same or similar line of business as the subject company being appraised, if such companies exist. Such companies are generally referred to as "guideline" companies as they assist the appraiser in establishing a framework for value.

I agree with RLL that you and your boss are both partially correct. But is also important to look at the prospects and projections for the subject company and not to rely soley on past results.

Valuation is generally prospective in nature. That is, one must look to future earnings as well as prior operating results.

As a specific reference, I suggest the text ESOP Valuation published by the National Center for Employee Ownership in Oakland, CA.

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asky