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Addressing ESOP Valuation Challenges During COVID-19

Addressing ESOP Valuation Challenges During COVID-19

April 20, 2020 - With the exponential spread of the COVID-19 virus triggering extended governmental stay-at-home orders, the resulting economic turmoil is providing a new challenge for ESOP companies, particularly with their business valuations.

Gone are the highs of the S&P 500, which experienced over 30% growth during 2019. And over the first 100 days of 2020, most experts agree that we have entered an economic recession—and many hint that we may have even entered the start of a deeper depression. This quick shift has left ESOP companies wondering what to do with valuation reports—and corresponding stock prices—that may no longer be in line with the current economic environment.

For companies that have experienced material changes to their business since the end of 2019, the valuation imbalance creates a critical issue in which plan distribution values no longer reflect actual values of the underlying company. ESOP trustees, who have a fiduciary responsibility to act in the best interest of plan participants are left wondering what can be done to fix this problem.

ESOP companies are required to have their shares valued annually, and for most calendar year-end ESOP companies that valuation date is December 31. When deriving their business valuation conclusions, the information that valuation analysts can rely on is limited to what is known as of the valuation date. This means that for valuation reports not yet issued, analysts should not account for any effect that COVID-19 has had on the company, and they cannot amend already issued reports to address COVID-19 related impacts on the company.

Interim Valuation Date

Establishing an interim valuation date can help plan administrators overcome the valuation imbalance by establishing a new date, such as March 31, 2020, to revalue the company and any other assets held in the ESOP trust. This new valuation would take into account all COVID-19 related impacts on the company and bring the value in-line with the company’s current operational condition, which can then be utilized for all distributions and diversifications made after the interim valuation date.

However, before the fiduciaries of your plan adopt an interim valuation date, there are a number of items that should be considered.

Fiduciaries will need to review the ESOP plan documentation to see if it allows for an interim valuation date. The plan document will be the driving force that supports what is allowed, and thorough knowledge of the valuation language is critical to understanding the impact of the interim valuation date on the ESOP’s value.

If your plan document does not allow for interim valuations, the plan can be amended, but this should be done carefully with regard to the following; Company value can have swings in both directions. If your company adopts an interim valuation to address a decrease in share value, is there now precedent set to adopt interim valuations for substantial share value increases?

Companies should not continually adopt interim valuation dates, so what are the required economic and company conditions necessary to establish a new valuation date?

These considerations and numerous others should be discussed and documented between the trustees, plan administrators, and other advisors to the ESOP.

Before adopting an interim valuation date fiduciaries and plan administrators should also consider:

  • Is the COVID-19 related impact representative of a more short-term disruption or one that is more sustained?
  • How has the outlook for the company changed?
  • What are the current distribution obligations of the plan?
  • What other effects to plan participants will a new valuation date cause?
  • Do you need to speak with your valuation firm to understand the process and costs of getting an interim valuation?
  • Does the company have any warrants or SARS plans that could be affected by a new valuation?
  • How will the interim valuation decision-making process be documented?
  • Are there additional modifications to plan documents that should be considered in addition to an interim valuation date?

Turn to ESOP Experts for Guidance

Managing the valuation share price is just one of the many issues caused by the COVID-19 pandemic for ESOP companies. As you navigate these uncertain times, reach out to your ESOP providers who can help you walk through all the necessary considerations surrounding the need for an interim valuation. Your trusted advisors can help you make the best decisions to to help bolster your plan in the short-term and sustain it over the long-term.


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