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.

posted by evan@abrc-esop.com  # 9:39 AM