Will Your ESOP Valuation Pass DOL Strutiny?
The Department of Labor (“DOL”) has not been shy about expressing their distaste for ESOPs. One DOL official even went as far as saying, “I have never seen a good ESOP.” This animosity toward ESOPs prompted GreatBanc Trust Company to address the issue head on. It initiated discussions with the DOL, which resulted in a document called the Fiduciary Process Agreement (“FPA”). While the FPA only officially applies to GreatBanc, the DOL stated in a press conference that, “[o]thers in the industry would do well to take notice of the protections put in place by this agreement.”
The FPA lists 16 specific things that ESOP trustees should analyze and document when assessing the work of valuation advisors. These specific items are:
- Marketability discounts;
- Minority interests and control premiums;
- Projections of the company’s future economic performance and the reasonableness or unreasonableness of such projections, including, if applicable, the bases for assuming that the company’s future financial performance will meet or exceed historical performance or the expected performance of the relevant industry;
- Analysis of the company’s strengths and weaknesses, which may include, as appropriate, personnel, plant and equipment, capacity, research and development, marketing strategy, business planning, financial condition, and any other factors that reasonably could be expected to affect future performance;
- Specific discount rates chosen, including whether any Weighted Average Cost of Capital used by the valuation advisor was based on the company’s actual capital structure or that of the relevant industry and why the chosen capital structure weighting was reasonable;
- All adjustments to the company’s historical financial statements;
- Consistency of the general economic and industry-specific narrative in the valuation report with the quantitative aspects of the valuation report [author comment: this implies that the economic and industry analysis should be relevant to the subject company, and not just a cut and paste of a generalized economic or industry write-up found by the valuation advisor];
- Reliability and timeliness of the historical financial data considered, including a discussion of whether the financial statements used by the valuation advisor were the subject of unqualified audit opinions, and if not, why it would nevertheless be prudent to rely on them;
- The comparability of any companies chosen as part of any analysis based on comparable companies;
- Material assumptions underlying the valuation report and any testing and analysis of these assumptions;
- Where the valuation report made choices between averages, medians, and outliers (e.g., in determining the multiples(s) used under the “guideline company method” of valuation), the reasons for the choices;
- Treatment of corporate debt;
- Whether the methodologies employed were standard and accepted methodologies and the bases for any departures from standard and accepted methodologies;
- The ESOP sponsor’s ability to service any debt or liabilities to be taken on in connection with the proposed transaction;
- The proposed transaction’s reasonably foreseeable risks as of the date of the transaction;
- Any other material considerations or variables that could have an significant effect on the price of the employer securities.
The analysis and report of the valuation advisor should address these 16 items. At Gibraltar Business Valuations, our ESOP valuation reports have always addressed these 16 points even before the FPA was issued. For top quality ESOP valuations and peace-of-mind knowing your valuation can hold up to the scrutiny, call at 312.883.8850.
 June 30, 2014, EBSA News Release, U.S. Department of Labor.