ESOP Valuations in the Downturn

It is far from a scientific sample, but ESOP valuation advisors are generally telling us that their clients are doing about as well as or somewhat better than non-ESOP clients in terms of their stock values. Paul Halverson of Chartwell Capital Solutions, for instance, reports that ESOP companies are doing about as well as non-ESOP companies, but that their values are not declining as much as the market as a whole. His explanation is interesting: "In the M&A markets, what we see is buyers have reduced their valuations so low that most sellers are choosing to not sell, but rather hold onto their company. If sales are occurring, it may be factors other than valuation that drive the transaction, i.e., poor health of the owner, lack of interest in the business, 'I just want something out of the company,' etc. So, the 'deals' that happen are more distressed sales at reduced values. The valuation challenge becomes, in that situation where a buyer's value is less than a seller's willing sale price, what is 'value'? We think it is somewhere above the buyer's 'bargain value' and the seller's idea of what value was a year ago. That is really where we see ESOP values holding up a bit relative to reported transactions and public market values."

A number of other valuation consultants said the key issue was leverage. Highly leveraged companies were facing a lot more difficulties this year no matter what their financial structure. None of the respondents, however, indicated that ESOP companies were doing worse than non-ESOP companies, and about half said they were doing somewhat better.