THE VALUATION PROCESS
With decades of experience representing fiduciaries in ESOP transactions, Mr. Kubersky has evolved a meticulous and flexible system to guide his clients through the process of ESOP valuation, implementation, and a successful transaction.
In order to accomplish this goal, Mr. Kubersky is independent of all parties other than the ESOP. He works with the ESOP fiduciary and the fiduciary’s advisers and counselors to establish a fair and equitable basis upon which the ESOP can acquire stock in the employer’s company.
Transaction DefinedRelationship Established
The first step in the valuation process is defining the scope of the proposed transaction. Among the tems that should be spelled out are:
• The number and percentage of shares being acquired by the ESOP.
• Whether the value will be expressed on a minority or majority basis.
• How, in general terms, the proposed transaction is to be financed.
• The types of financial opinions that Mr. Kubersky will render.
• The valuation date.
It is important that the ESOP fiduciary be clearly identified as the client. While the ESOP fiduciary is the client, the company, as sponsor of the ESOP, is the source of the associated fees.
Due Diligence Data Collection
Following his engagement, Mr. Kubersky conducts a due diligence process in which he gathers the information that any prudent buyer would require in order to make a decision as to whether to purchase a company or the shares in a company. He conducts on-site field interviews with management in order to gather both qualitative and quantitative information that go into his analysis and opinion of value.
The due diligence process and analysis result in a conclusion of value that is explained in detail to the ESOP's fiduciary and legal counsel. The logic behind the value opinion and the conclusion are thoroughly discussed and vetted. This discussion provides the information the fiduciary needs to establish a negotiating position with the seller. Only when the client clearly understands the conclusion, and the process that led to it, is a letter of value opinion issued.
TransactionBring Forward Letter
Valuation is always date specific. Since time elapses between the initial valuation and the date when a transaction can reasonably occur, Mr. Kubersky issues an opinion of value on the actual date of the transaction that brings forward the initial valuation opinion.
In order to do this he ascertains that the value of the company or the shares of the company have not declined since the date that the initial valuation opinion was issued.
The bring forward letter is a summary letter of opinion detailing the factors considered, valuation logic, and methodologies applied. This letter, which is sufficient to execute the transaction, states that the specific purchase of shares does not result in the ESOP paying in excess of fair market value.
Leveraged and other ESOP transactions frequently have aspects that require the independent appraiser/financial advisor to render additional opinions to the effect that:
• Whether the consideration to be paid by the ESOP for its purchase of shares of common stock represents an amount greater (or less) than fair market value as such term is used in determining “adequate consideration”, as defined in Section 3(18) of ERISA;
• Whether the interest rate on notes issued by the ESOP to the seller(s) are at least as favorable to the ESOP as interest rates that could be negotiated at arm’s length between the ESOP and a commercial lender;
• An analysis of the level of debt to be incurred in order to effect the ESOP’s acquisition of common stock including an analysis of projected debt coverage and liquidity ratios;
• That the terms of the ESOP’s purchase of common stock are fair, from a financial point of view, to the ESOP participants; and,
• Whether synthetic equity and shares allocated in a plan to provide management personnel with an equity interest in the Company constitutes a fair and reasonable level of equity compensation with respect to the interest of the ESOP as a shareholder of that Company.
Development and Delivery of Documented Report
Following the transaction, a narrative report with supporting documents, exhibits and appendices, is developed and sent to the ESOP fiduciary.
After the initial transaction, the ESOP fiduciary is required to obtain an annual valuation as of the close of each ESOP fiscal year. This valuation requires an annual due diligence and field visit interviews and is supplied in two stages. The first is a summary letter of opinion that is first explained orally to the ESOP fiduciary. This letter is sufficient for the ESOP administrator to make the annual account balance computations. Following delivery of the summary letter of opinion, a narrative report with supporting documents, exhibits and appendices, is developed and sent to the ESOP fiduciary.