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Financial Valuation: Applications and Models, + Website, 3rd Edition by James R. Hitchner

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Chapter 17

Employee Stock Ownership Plans

A fair-haired child of Congress and rightfully so.

Valuations of closely held securities held by employee stock ownership plans (ESOPs) differ from other types of closely held company valuations. It is important that the analyst understand these differences, especially the restrictions placed on ESOP shares. This chapter explores and defines these various differences, evaluates their individual and cumulative effect on the valuation process, and reconciles the findings. The focus here is to offer practical advice for the valuation of ESOP shares.

INTRODUCTION TO EMPLOYEE STOCK OWNERSHIP PLANS

Employee stock ownership plans or trusts, often referred to as ESOPs or ESOTs, have been in existence since the enactment of the Employee Retirement Income Security Act (ERISA) in 1974. ERISA was enacted by Congress to provide incentives to encourage ESOP usage by spreading the wealth of equity ownership to participating employees. An employee stock ownership plan is a qualified employee benefit plan subject to the provisions of ERISA.

An integral component of an ESOP is its qualified status as an ERISA defined-contribution plan. An ESOP is designed to invest primarily in employer securities of a sponsoring corporation. Corporations can sponsor ESOPs whether the shares are traded on a public market or privately held. Companies that sponsor ESOPs generally have a business culture that allows employees to think and act like owners. Basically, an ESOP ...

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