ABRC-ESOP

How can I determine what my company is worth? Business valuation and the method used to determine that number is the most common question I get from owners contemplating selling to an ESOP.

There are three primary valuation methods:

Comparable Method: This is where the appraiser looks at companies that are similar to the selling company to determine a price. This is similar to realestate comps in the housing market. While this may work for larger companies, it is usually not effective for smaller companies, as the data necessary for such comparisons is not available to the public.

Income Method: The Income Method is preferred when comparables are not available. Its primary focus is to look at the cash flow of the company vs. the inherent risks and determine a value based on that relationship. This is particularly well suited to service-based companies that do not have substantial tangible assets.

Asset Method: Asset based valuations should always be looked at as part of the process, but are rarely used in ESOP stock transactions. It is more common in sales that don't involve company stock.

A well done ESOP appraisal should use all the above three methods. However, the weight given to each method is a function of the ESOP appraiser's judgment.

One of the most confusing areas regarding ESOPs are the rules regarding Fiduciary Responsibility. In fact, this is one of the most common questions I receive during the conferences I speak at.

An ERISA Fiduciary (trustee) Must Act:

• Solely in the interests of the ESOP plan participants
  
  
• With care, skill and prudence that a prudent person familiar with such matters would use under the same circumstances (the prudent man rule)
  
  
• In accordance with the terms of the plan documents insofar as they are consistent with ERISA law.
  
  

However, Board actions that affect the Company's operation and assets (even in a 100% ESOP-owned company are not subject to the above standards.

One question that comes up regularly at employee meetings I've attended has to do with how employees can make a positive impact on the stock value of their company.

In ESOP companies, the company stock must be appraised every year by an independent valuation expert to determine the "fair market value" of the stock.

The methods that the appraiser uses can be complex, but the logic is simple: What would someone pay for a share of stock in the company? Some factors can be influenced by employees and some can not.

WHAT FACTORS WILL AFFECT STOCK VALUE IN AN ESOP COMPANY?

• Taking On New Company Debt :
  
  We know that taking out a loan will have a negative impact on the value of an ESOP company. Much like a home mortgage, the asset is worth less until you build up equity by repaying the loan. While the typical employee of an ESOP company will not make strategic decisions to repay debt, they can help generate the cash needed to make the loan repayments to build the value up.
• S Corporation Status:
  
  As a 100% ESOP-owned company that has elected S Corp. tax status - the company will not pay taxes on any of the profits earned. Those former tax dollars can be reinvested to grow the business. The performance of all employees on the job can multiply the advantage of this tax status.
• Productive Use of Time:
  
  Avoiding rework, starting on time, having the right people do the right jobs, and doing the job more efficiently can have a powerful impact on the stock value in an ESOP company.
• Safety:
  
  Safety is something that employees have much more control over than ESOP company leaders - and it can have a tremendous impact on the stock value of an ESOP company. By following safety procedures, an ESOP company can avoid the cost of accidents and non-productive time.

ESOP companies long ago learned what many companies are just now learning; you can offer all the benefits in the world, but the one that matters most to employees is a piece of the action. Of the 18 honorees in Winning Workplaces' fourth annual Best Bosses competition, 14 run companies partly or completely worker-owned. That reflects a broader trend. The National Center for Employee Ownership estimates that 9,225 U.S. companies are offering stock-option plans, stock bonus plans, and profit-sharing plans as of July, up from 7,600 in 1999.

ESOPs are a very economical way to provide this benefit to employees as well as provide growth opportunities for the sponsoring company.

This year, Winning Workplaces has teamed with the Wall Street Journal's new "Startup Journal" to solicit nominations for "Winning Workplaces 2007." If you are an ESOP company, you can nominate your own company or submit a nomination for a company you think is deserving. To complete the nomination form, visit http://www.winningworkplaces.org/bestbossesaward/howtoapply.php.

Companies that adopt Employee Stock Ownership Plans (ESOPs) outpace industry peers in financial performance, according to a study.

Hewitt Associates, in conjunction with the Northwestern University's Kellogg graduate School of Management, analyzed all 382 publicly-traded U.S. companies that adopted ESOPs from the early 1970's to the early 90's.

In total shareholder return, those companies outperformed peers without such plans by a cumulative 6.9% percentage points in the four years after the ESOP was adopted. In return on assets, the difference was 2.7% annually.

Hewitt attributed the improved performance to the "ownership dynamic," in which employees feel a financial and psychological benefit to participating in ESOPs. 82% of company executives said their ESOPs had a positive effect on business results.