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Contents
Quick Links to SC&H Group, LLC ESOPs as a Liquidity Event The credit crunch and recession that the United States has endured during the past 12 to 18 months has created a difficult environment for owners of small and middle-market companies to sell their businesses. Although signs of economic recovery are on the horizon, the M&A markets remain sluggish. Despite the current market conditions, Employee Stock Ownership Plans (ESOPs) remain a viable strategy for business owners who desire either a full or partial liquidity event. An ESOP is a qualified retirement plan that primarily invests in the stock of the employer company. Thus, an ESOP can be used by a business owner to "create" an internal buyer of company stock. In addition, ESOPs can create substantial tax benefits for both the corporation and selling shareholder. As an ESOP-owned company, SC&H has the real world experience necessary to help our clients navigate the unique aspects of an ESOP. We rely on the specialized knowledge of our professionals to serve ESOP clients nationwide, assisting selling shareholders, plan sponsors and trustees in establishing and maintaining well designed ESOPs. Our services cover both the initial ESOP transaction as well as annual compliance issues and include all of the following:
If you are considering your options for a liquidity event, an ESOP may be the most beneficial vehicle to realize the highest level of after-tax proceeds. If you, or one of your clients, may benefit from considering an ESOP as an exit strategy, please contact one of our ESOP professionals by email at esopvaluation@scandh.com or call (410) 403-1500 or (800) 832-3008.
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Valuations Insights, Fourth Quarter, 2009 Experts Duel Over Discounts in Minority Shareholder's Divorce Wright v. Wright, 2009 WL 724153 (Ala. Civ. App.) March 20 2009 At the center of this divorce: Whether valuation of the husband's 25% interest in an office products company (a subchapter S corporation) was subject to marketability and minority discounts. When experts diverge on valuations. Experts on both sides agreed that the S Corp's book value was slightly more than $2.5 million. In addition to book value, the wife's expert applied the three traditional valuation approaches: asset, market and income, coming up with a range of values from $1.7 to $5.1 million. The trial court used book value as the baseline. Based on this, the wife's expert said that the husband's 25% interest was worth $638,000, without applying any discounts for the minority shares or their lack of marketability. The husband's expert calculated $300,750 value, which reflected minority and marketability discounts. (The published decision does not specify the percentages). Without giving a particular reason, the Alabama trial court judge said: "I don't think either one of them (the experts) is dead on." And the court finally settled on a value of $500,000 for the husband's interest in the S corporation. The husband appealed, arguing that the court erred by failing to apply discounts. In recapping the testimony of the wife's expert, the appellate court noted that that expert's market approach estimate, once discounted by 30% came very close to the book value relied upon by the trial court. Based on that testimony, the court held that the wife's expert clearly included a 30% discount in estimating the husband's minority interest in the S Corp. Thus, the trial court's reliance on this value was not erroneous. Can the owner of a business rebut expert testimony? In an interesting side issue, the appellate court considered the husband's attempt to personally rebut the wife's expert's valuation testimony. The wife's attorney objected, acknowledging that a business owner can give an opinion as to its value—but not to "sharpshoot" an opposing expert's value. On appeal the husband cited Rule 701 of the local rules of evidence, which permits a lay witness to give an opinion when it: 1) is based on the witness's rational perceptions, and 2) would help determine a disputed issue. The court of appeals agreed. Unfortunately for the husband, his attorney failed to make an offer of proof preserving what the husband's testimony would have shown. Thus, the appellate court had no record by which to settle the question and sustained the trial court's exclusion of the husband's rebuttal opinion.
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