Daniel Cooper

E: dcooper@pcecompanies.com

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An employee stock ownership plan (ESOP) is a unique type of retirement plan that continues to increase in popularity and enjoys an impressive success rate. Why? Because this remarkable employee benefit plan allows employees—via a dedicated trust—to become owners of the company through the allocation of company stock.

But ESOP-owned companies have distinct stock valuation needs that differ from those of traditional businesses. As a trustee working with an existing or potential ESOP, you must develop an understanding of the sponsor company’s value, which is calculated within the three types of ESOP valuations: an initial fairness opinion, an annual update, and a final fairness opinion.

The Trustee's Role: What You Need to Know

Before exploring the three types of ESOP valuations, let’s answer a couple of key questions about your pivotal role as a trustee.

What is the trustee’s role in an ESOP valuation? In order to comply with the law, you must obtain an independent appraisal of the company shares held by the ESOP. As the most important player in this critical process, you have a fiduciary duty to the ESOP and its participants. That means you are responsible for representing participants’ interests and for making a final determination of value, which will be based on an independent appraiser’s recommendation.

Who supports the trustee in this valuation process? To ensure that trustees and others comply with the Employee Retirement Income Security Act of 1974 (ERISA), the US Department of Labor (DoL) provides federal oversight of all ESOPs. The DoL can launch an investigation against any trustee who fails to determine in good faith the value of the ESOP-owned stock.

That’s why, as the ESOP trustee, you’ll need to hire a financial advisor to appraise the ESOP-owned stock. The appraiser will make an independent valuation recommendation (e.g., $10 per share) to the trustee; any perceived threats to that impartiality would be a red flag for regulators. The best way to comply and ensure independence is to hire an appraiser who has no prior work or personal relationship with the company or its shareholders.

Next, let’s examine the three types of valuations you may need as an ESOP trustee.

Type 1: The Initial Fairness Opinion

Once a company has decided to implement an ESOP, you’ll need to obtain an initial fairness opinion valuation to determine how much the ESOP will pay for the selling shareholder’s stock. The trustee is tasked (under various regulations and ERISA) with ensuring that the ESOP pays no more than “adequate consideration” for the stock.

The initial FO valuation must be available in draft form before you negotiate the stock purchase price and must be finalized at the time the ESOP is formed. If the business valuation is not completed adequately and in compliance with the rules, you could be investigated by the DoL or, worse, dragged into a lawsuit. Ensuring fairness and compliance with regulations will not only help you avoid this problem, but also give employees confidence in the ESOP structure.

Type 2: The Annual Update

After the ESOP is in place, you’ll need to conduct an independent annual update valuation as you set the stock price. This valuation process determines the fair market value of the ESOP’s shares for yearly reporting purposes. By calculating (through the independent valuation) and reporting the value of assets, you help the ESOP comply with ERISA.

It is best if the annual update is completed at least one month before the sponsor company files its Form 5500 (Annual Return/Report of Employee Benefit Plan) so that those who help prepare this essential tax document have sufficient time to add the finishing. The Form 5500 filing deadline is generally the last day of the seventh month after the end of the plan year, although it can be extended for up to two and a half months if the company files Form 5558 (Application for Extension of Time to File Certain Employee Plan Returns). The company must file the extension form within seven months of the end of the plan year.

Type 3: The Final Fairness Opinion

Last, the final fairness opinion valuation is necessary to determine the price at which the ESOP would be permitted to sell shares to a third party. However, not all ESOPs require a final fairness opinion valuation. Only companies considering a sale (e.g., selling the company to a competitor) need to receive a fairness opinion. A draft of the final fairness opinion valuation work must be available before you begin negotiating the sale price; the valuation must be finalized by the time the ESOP sells the stock to the third party.

Once again, you’ll need to negotiate a selling price to ensure that the ESOP trust (on behalf of the employees) is receiving no less than adequate consideration for the stock that is sold. You’ll also want to focus on receiving cash up front for the trust because waiting on deferred or contingent consideration adds complexity and is burdensome for the ESOP’s participants.

Key Takeaways

  • There are three types of ESOP valuations. Determining a fair and accurate value of an ESOP’s shares can happen as part of obtaining an initial fairness opinion, an annual update, and/or a final fairness opinion.
  • Trustees are the most important players. Your fiduciary duty to the ESOP and its participants comes first. You will determine the final stock value based on the appraiser’s recommendation.
  • Trustees should hire an independent appraiser. To be objective, the valuation specialist must not have any personal or professional ties to the company or its shareholders.
  • The Department of Labor oversees ESOP compliance. Trustees must be meticulous when determining the value of the ESOP-owned stock. If the DoL suspects carelessness, it may prosecute you for approving an incorrect valuation.


Thorough ESOP valuations safeguard the company’s and employees’ interests alike, creating a robust and trustworthy ESOP structure that benefits everyone. As an ESOP trustee, you can confidently navigate the valuation process by engaging experienced valuation professionals who possess knowledge of the law and of relevant appraisal techniques.

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Daniel Cooper


Daniel Cooper


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201-425-1671 (direct)


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