ESOP Valuation

An employee stock ownership plan (ESOP) is a defined contribution employee benefit plan which is aimed to motivate employees to acquire ownership in the company to align their interests with shareholders. It is focused to improve efficiency of employees. ESOP also provides significant tax advantages. 

ESOP Valuation in India

ESOP Valuation differ from other valuations

Employee stock ownership plans are qualified retirement plans governed by the Employee Retirement Income Security Act (“ERISA”).  A regulatory requirement of ERISA is that ESOP pay no more than “adequate consideration,” or fair market value, as reasonably determined by a trustee of an employee stock ownership trust, when investing in employer securities. ESOP valuations are also reviewed by Internal Revenue Service (IRS) and Department of Labour (DOL).

ESOP regulations imposes numerous conditions on the sponsoring employer and restrict the voting rights of ESOP shares. ESOP’s are unique and require thoughtfulness in the evaluation of the fair market value of diluted common equity interest owned by ESOP in private companies.

Valuation of ESOPs is generally more complicated than other valuations of businesses. The Valuation of ESOP include adjustments relating to fair market value, discounts for lack of control and marketability, tax pass-through status and other factors.

So, an independent third party is required to perform ESOP valuation who does not have any present or prospective interest in the valuation result. An appraiser should have reasonable knowledge and expertise to conduct valuation of ESOPs.

ESOP valuation is undertaken to determine the ESOP compensation expense to be reported in profit and loss statement and taxes payable by employees. The ESOP compensation expense has a negative effect on earnings per share of the company. So, an accurate ESOP valuation is necessary.

How we support you?

The purpose of valuation is to establish the fair market value of the Subject Interest for annual ESOP administration.

We at Veristrat have the required skills and expertise to perform ESOP valuations to determine fair market value of fully diluted common equity interest owned by ESOP in private companies across all industries.

  • Performing ESOP valuations according to regulations of Employee Retirement Income Security Act of 1974 (“ERISA”), Internal Revenue Service (IRS) and Department of Labour (DOL).
  • Conducting ESOP valuation considering all elements listed in Internal Revenue Service Revenue Ruling 59-60.
  • Reviewing Company’s financial information, earning capacity and dividend-paying capacity.
  • Doing Research on the relevant industry and general economic conditions.
  • Performing valuation of ESOP using the income-based approach (Discounted Cash Flow Method and Capitalization cash flow method), the market-based approach (the Merger and Acquisition Method and the Guideline Public Company Method); and asset-based approach.
  • Considering discounts and/or premium relevant to the Subject Interest, as appropriate.
  • Preparing valuation report stating our analysis of the fair market value of the Subject Interest, the approaches used for valuation, and the assumptions relied upon in our analysis.
How we support

We at Veristrat are dedicated to provide professional, ethical and high-quality ESOP Valuation. Our ESOP Valuation services are customized to serve our clients’ demands. Our in house experts select the most appropriate approach for ESOP valuation to achieve sustainable results. We develop comprehensive valuation report that delivers our opinion clearly.