The Pandemic Effect: ESOP Valuations

Year-end and Interim ESOP Valuations

ESOP appraisers face a multitude of complex valuation issues related to warrants, tax shields, ESOP expenses, and other issues. Two issues that are relevant right now amidst the pandemic related to COVID-19, are the handling of annual valuations dated December 31, 2019 (which, in our experience, seem to make up the majority of ESOP valuation dates) and interim valuations.

Annual Valuations

Annual ESOP valuations are required by law and serve a variety of purposes related to future activity during a given year related to distributions, dividends, diversification, contributions, and also participant statements.

Adhering to the standards of Adequate Consideration (per ERISA) and Fair Market Value (per proposed DOL regulations and Revenue Ruling 59-60), the only information that was known or knowable as of the valuation date should be included in the valuation analysis. Implications of COVID-19 should not be considered in valuations using a December 31, 2019 effective valuation date. Appraisers should be wary of financial projections that are not consistent with a company’s performance, outlook, and market conditions as of year-end. Given the strong performance of stock market indices well into February, it is unlikely that the damage the pandemic would have on the economies of the world was knowable. We advise that an adequate disclaimer be included in December 31, 2019 ESOP valuations reports regarding the exclusion of COVID-19 implications.

Interim Valuations

With the market correction and uncertainty regarding many companies’ prospects in the pandemic environment, interim valuations could be much different than at year-end. There are no regulatory rules regarding interim valuations, and it is advisable to review plan documents for initial guidance; even if an interim valuation is not mentioned, it might not preclude an amendment to allow one.

Are interim valuations appropriate? If there hasn’t been a meaningful impact on a company’s prospects such as a government contractor, perhaps, it might not be as compelling as for a restaurant.

The decision to undertake an interim valuation is not an easy one and the roles of plan administrators, sponsors and trustees are amplified in this environment. Again, there are many issues to consider including timing, consistency, and fairness. Fairness could be particularly difficult given the varying constituents, but we believe interim valuations should account for the fairness of the participants as a whole.

If you’re looking for more information on business valuations or just need some advice, contact us today.

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Rich Barth is Managing Director at Vantage Point Advisors, Inc. He has compiled over 20 years of international investment banking and valuation experience at firms including Goldman Sachs, HSBC Securities and Houlihan Lokey.