1. Basic ESOP Valuation The ESOP Association Las Vegas Annual Conference
November 8, 2012
Basic ESOP Valuation
Barry Goodman
Arlene Ashcraft
Pamela Steverango

2. Agenda Income Approach Market Approach Employee Communication
Barry Goodman – Advanced Valuation Analytics, Ltd.
Market Approach
Arlene Ashcraft – Columbia Financial Advisors Inc.
Employee Communication
Pamela Steverango – Chartwell Capital Solutions

3. Barry Goodman – Advanced Valuation Analytics, Ltd.
Income Approach
Barry Goodman – Advanced Valuation Analytics, Ltd.

4. Capitalization Of Cash Flow Method
Estimate the capitalization rate.
Estimate the cash flow capacity.
Divide the cash flow capacity by the capitalization rate.

5. Capitalization Rate
Factor, expressed in %, used to convert anticipated benefits into a current value
Considers interest rates, rates of return expected by the market, and risk of the anticipated benefits

6. Cash Flow Capacity The company’s ability to produce profit
Looks at historical profit – not anticipated future profit
Estimation Methods
Most recent year
Mean or weighted average
Another way to estimate cash flow capacity-
Projected Year

7. Net Sales and EBIDTA

8. Gradual Increase

9. Erratic History

10. Hockey Stick

11. Revenue Projections: Last Year and This Year

12. EBITDA Projections: Last Year and This Year

13. EBITDA Margin Projections: Last Year and This Year

14. Historic Success At Forecasting Next Year’s EBITDA

15. Discounts/Premiums Yes No Yes No Yes No
Does the interest holder have control over the entity?
Yes No
Is there a public market for the interest?
Is there a public market for the interest?
Yes No
Yes No
Controlling, non freely traded value
Controlling,
as if freely traded value
Non-controlling, as if freely traded value
Non-controlling, non freely
traded value

16. Appendix A: Balance Sheet

17. Appendix B: Income Statement

18. Arlene Ashcraft– Columbia Financial Advisors, Inc.
Market Approach
Arlene Ashcraft– Columbia Financial Advisors, Inc.

19. Market Approach Also called the “Sales Comparison Approach”
Based on the theory of substitution
In real estate, appraisers look at data on sales of comparable properties. In business valuation, the theory is the same.
A business appraiser interprets transaction data to help guide the determination of appropriate multiples of various measures (cash flow, earnings, book value, etc.) to derive indications of value for the subject company

20. Market Approach
The market approach consists of any/all of the following:
An analysis of previous sales or offers for the subject company’s stock
Sales of entire public or privately held companies similar to the subject company
And/or sales of stock of publicly traded companies similar to the subject company

21. Market Approach-Value Drivers
These are the same as in the income approach:
Cash Flow
Risk
Growth
All of the above influence the price paid for a whole company or a single share in a company

22. Market Approach-Value Drivers
What drives value?
Macroeconomic factors
Industry factors
Company specific factors
Prices can change rapidly for publicly traded companies, as perceived changes in the above drivers become incorporated quickly into the share price

23. S&P 500 Index from January 2002 through September 2012
The chart below shows the variation in the S&P 500 Index over time. The horizontal line is the starting value for the S&P 500 in January 2002.

24. Snapshot: S&P 500 Index from Sept. 26, 2008 to Oct. 15, 2008

25. Market Data Issues with the market approach
Comparability – determination and availability of data
Each subject company is different and unique, but companies that have similar growth and risk drivers can still be appropriate to use as comparables
Volatility-Public Companies
Timely Data & Completeness of Data-Merged and Acquired Companies
Positive features of the market approach
Timely data
Incorporates up-to-date perceptions of risks/benefits of investment
“Real world” transactions

26. Market Approach – Public Companies
Assessment of relative risk and return
Selection and application of multiples
Weighting of indications of value derived
May change from year to year
Usefulness of underlying data
Indicated Value
Minority Marketable

27. Market Approach – M & A
Relatively similar approach as in the public company market method
Assessment of relative risk and return
Selection and application of multiples
Weighting of indications of value derived
May change from year to year
Usefulness of underlying data
Indicated Value
Control Marketable or Control non-Marketable

28. Historical M&A Transaction Volume

29. Concluded Value Reasonable given value basis
Strengths and weaknesses of each
Final weighting of concluded values
Implied multiples

30. Employee Communication
Pamela Steverango – Chartwell Capital Solutions

31. Why? ESOP companies must share certain information with participants
Annual participant statement
Summary Plan Description (SPD)
Summary annual report on the activity in the plan
Additional disclosure for public companies

32. What?
Some ESOP companies choose to share more financial information and communicate more with participants
Value is determined on an annual basis by an independent appraiser and is not arbitrarily set by management
There are a number of ways of looking at value
There are external factors and internal factors that affect value, some of which are beyond your Company’s control
Each Employee can impact value

33. Influencing Factors External Internal
General & Regional Economic Condition
Regulatory Considerations
Specific Industry Condition
Capital Markets Condition
Internal
Operational Factors
Financial Performance and Outlook
Vendor Relationships
Customer Relationships
Management Capabilities
Personnel

34. Company Operational Factors
Other
Technology
Administration
Business Development
Activity
Risk
Relative Size
Industry Position
Quality of Earnings
Customer Concentration
Product Diversity
Geographic Diversity
Leverage
Off B/S Liabilities
Personnel
Depth and strength of management team
Longevity and expertise of key personnel
Ability to attract key personnel
Strong HR department
Profitability
Margins
Fixed Cost Leverage
Volatility
Growth
Diversification of end markets
Breadth and depth of service specialties
Geographic diversification
Corporate growth strategy and vision
Reputation in marketplace

35. How? Clarify expectations Initial Communication
What does it mean to think and act like an owner in your company?
How does this differ from perceptions people have about ownership?
Initial Communication
Start from the participant point of view
Make it understandable
Seemingly “ungrateful” or probing questions could be a good sign
No questions could be a bad sign

36. Initial Communication Sample Outline
Benefits of an ESOP
How an ESOP Works
How the ESOP Buys Stock
Required Players and Roles
Benefits and Risks of Ownership
Sub S Corporation Status

37. Initial Communication Sample Outline
Who is Eligible to Participate in the ESOP?
Who gets Allocations of Contributions?
When Will I Receive my Benefit and How is it Paid?
Value of Company Stock and My Account
Vesting
Summary Plan Description

38. Questions? ?

39. Speaker Information
Barry Goodman Advanced Valuation Analytics, Ltd L Street NW | Suite 605 Washington, DC Arlene Ashcraft, CFA, ASA Columbia Financial Advisors, Inc. 720 SW Washington Street | Suite 650 Portland, OR Pamela Steverango, CFA Chartwell Capital Solutions One Market | Spear Tower | 36th Floor San Francisco, CA

40. Barry R. Goodman, CFA, ASA, CPA/ABV, CBA, CFP
Barry has the following professional designations that require an examination:
Chartered Financial Analyst
Certified Business Appraiser
Certified Public Accountant
Accredited in Business Valuation
Accredited Senior Appraiser - American Society of Appraisers
Fellow - Financial Analysts Federation
Certified Financial Planner
In addition, he is active in the following organizations:
American Society of Appraisers
(Business Valuation Specialty)
American Institute of Certified Public Accountants
Greater Washington Institute of Certified Public Accountants
(Valuation Committee)
Employee Stock Ownership Association
(Business Valuation Advisory Committee/Chairman of Leverage Buyout Sub-Committee)
National Economists Club
Washington Society of Investment Analysts
Barry R. Goodman
Advanced Valuation Analytics, Inc.
1901 L Street, NW Suite 605
Washington DC

41. Arlene L. Ashcraft, CFA, ASA
Principal and Shareholder Arlene Ashcraft has been engaged in business appraisals since She specializes in ESOP valuation and financial advisory services and appraisal assignments for litigation support purposes. Ms. Ashcraft is an Accredited Senior Appraiser of the American Society of Appraisers designated in Business Valuation, and a Chartered Financial Analyst. She is the current Treasurer of the American Society of Appraisers Portland, Oregon Chapter and Editor of the American Society of Appraisers Business Valuation E-Letter. Ms. Ashcraft earned her Masters of Business Administration from Portland State University in She is a member of the ESOP Association and an associate member of the ESOP Association’s Valuation Advisory Committee. Ms. Ashcraft has been a speaker on ESOP valuation issues at conferences and webinars sponsored by the National Center for Employee Ownership.
Arlene L. Ashcraft
Columbia Financial Advisors, Inc.
720 SW Washington Suite 650
Portland OR

42. Pamela D. Steverango, CFA
Managing Director
Pamela has provided financial advisory services to privately held companies since She is recognized as a leading authority on business valuation, particularly with respect to Employee Stock Ownership Plans and other qualified ERISA plans.
Pamela is a nationally recognized speaker on ESOP business valuations. She has been a featured speaker for The ESOP Association, the National Center for Employee Ownership, The ESOP Association - California/Western States Chapter, the AICPA, and for individual organizations on ESOP valuations and fiduciary issues as they relate to ESOP valuations.
Pamela is an active member of The ESOP Association’s Ownership Culture Committee, the National Center for Employee Ownership, The ESOP Association - California/Western States Chapter, the CFA Institute and Security Analysts of San Francisco.
Pamela is a Chartered Financial Analyst charter holder. She earned a Bachelor of Science degree in psychology from Oregon State University. Pamela also holds a Master of Business Administration degree, with an emphasis in finance, from Golden Gate University.
Pamela Steverango
Chartwell Capital Solutions
One Market Street, Spear Tower Suite 3600
San Francisco CA
chartwellcapitalsolutions.com