The ESOP as the Majority Stockholder – Part IV

Colin M. Henderson — January, 2021

Private Company ESOPs

Public company investors rely on regularly published financial information, security analyst’s reports, annual reports, and empirical market data (such as, but not limited to, stock price, price-earnings ratios, and trading volume) to maintain an awareness of the value and condition of their investments.

In contrast, private companies seldom publish comprehensive financial reports or commentary. There are neither empirical market data or security analyst’s reports available to investors of private companies.

Private company ESOP trustees will rely on contacts with the company and its management to obtain information. This type of information may include reviewing the company’s monthly or quarterly P & L and budget, the company’s internal newsletter, the company business plans, and minutes of management, board, and committee meetings.

Once a year, the private company ESOP trustee engages and oversees the services of a qualified financial advisor as required to conduct an independent fair market value (FMV) appraisal of the company’s stock held by the ESOT. This appraisal will determine the stock’s hypothetical fair market value and will be provided in a comprehensive report which contains schedules of financial matrices, assumptions, and market comparable data such as guideline public companies or merger and acquisition data used in deriving the concluded FMV.

Based on the results of the annual ESOP appraisal, the employer corporation common stock fair market value will be:

  • reported to the participants and beneficiaries as the value of their vested and non-vested prospective benefits,
  • reported to the Internal Revenue Service on the plan’s annual return Form 5500,
  • included in the trust’s annual audited financial report, and
  • used for determining the value of the current year death, disability or retirement benefits to eligible participants or beneficiaries.

Part III   |  Part V