Best Practices for Reviewing a Valuation Report
Presented By Aashna Kampani, Ventura Trust, and Melissa Goetz, Prairie Capital Advisors, Inc., September 17, 2025 at The ESOP Association Midwest Chapter Fall Conference in Chicago, IL.
Introduction
The valuation of company stock in an Employee Stock Ownership Plan (ESOP) is a complex process with significant fiduciary implications. Trustees bear the ultimate responsibility for determining fair market value, and their oversight of the appraisal process is subject to rigorous regulatory and legal scrutiny. A disciplined, well-documented approach to reviewing valuation reports is essential for ensuring compliance, minimizing risk, and protecting the integrity of employee ownership.
This article outlines best practices for trustees in reviewing valuation reports, including their fiduciary role, the appraisal process, common valuation methodologies, and the importance of consistent documentation.
The Trustee’s Fiduciary Role
Trustees are charged with establishing the ESOP share price at least annually. This responsibility is guided by the Prudent Expert Standard, which requires not only good intentions but demonstrable expertise, prudence, and care. Trustees must ensure that appraisers are both independent and qualified, and that their work is grounded in accurate, complete information.
Internal vs. External Trustees
Internal trustees often possess deep knowledge of company products, services, markets, and culture, but may lack technical expertise in trust law, ERISA, or valuation methodology.
External trustees bring independence and broader experience with transactions and valuation practices but may have less direct knowledge of company operations.
Both roles involve distinct strengths and challenges, underscoring the importance of collaboration and a structured review framework.
The Valuation Process
Valuations are required not only for annual updates but also for transactions, repurchase obligations, and other events. Oversight is intensifying, with the Department of Labor, IRS, auditors, and litigators all scrutinizing valuation practices more closely.
A robust valuation process typically includes:
Planning and Scope – Ensuring the company provides accurate and complete financials, projections, and company- and industry-specific information.
Site Visit and Due Diligence – Engaging management, verifying data integrity, and confirming assumptions.
Draft Report Review – Conducting a thorough evaluation, challenging assumptions, and comparing results to historical performance.
Final Determination of Fair Market Value – Establishing a conclusion in good faith, supported by a defensible process and adequate consideration.
Trustees should remain actively engaged at every stage, not simply at the conclusion. Documentation of each interaction, question, and analysis is critical.
Valuation Methodology
ESOP valuations are conducted under the standard of Fair Market Value—the price at which a willing buyer and willing seller would transact under no compulsion. Trustees must be conversant in the three principal approaches:
Market Approach: Evaluates value through comparison to publicly traded peers or recent merger and acquisition transactions. This method assesses how the market values similar businesses and provides external benchmarks for reasonableness.
Income Approach: Estimates value based on the company’s expected future cash flows, either discounted or capitalized, and the risks associated with achieving them. Trustees should understand the underlying assumptions used in this approach.
Asset Approach: Derives value from the company’s net asset base, adjusted to fair market value. It is typically most relevant for asset-intensive or underperforming businesses where income and market comparisons may be less meaningful.
While appraisers may weigh these approaches differently depending on the company’s circumstances, trustees should ensure that the selected methods and the rationale for their weightings are clearly explained and supported by the facts.
Discount Rates
Discount rates—typically derived from the Weighted Average Cost of Capital (WACC) or cost of equity— translate a company’s expected future cash flows into present value. The rate must align with the type of cash flows projected. They should reflect both objective market factors and subjective company-specific risks. Trustees must closely examine the rationale for changes in discount rates year over year. A meaningful year-over-year shift in the discount rate can significantly influence valuation outcomes, so trustees are expected to ask whether such adjustments are supported by evidence, for example, shifts in risk-free rates, capital structure, or company performance. It connects the valuation conclusion back to the company’s true risk and return profile.
Common Issues in Valuation Application
Trustees should scrutinize several recurring issues, including:
Treatment of repurchase obligations
Application of discounts for lack of marketability or control
Assumed tax rates
ESOP debt treatment
Incentive structures such as stock appreciation rights (SARs) or warrants
Aggressiveness or conservatism of financial projections
Projections warrant particular attention. Trustees should ensure that forecasts are developed with input from appropriate personnel, are supported by reinvestment plans, and are consistent with both historical results and industry conditions.
Framework for Trustee Review
A structured framework improves consistency and defensibility in valuation reviews. For example, Ventura Trust employs a checklist that covers:
EBITDA adjustments relative to prior years
Selection and weighting of valuation methodologies
Variance between projected and actual results
Discount rate build-up and capital structure assumptions
Rationale for comparable company selection and multiples applied
Year-over-year changes in performance, risk factors, and valuation multiples
Trustees should request “change tables” when not provided, to clearly identify what factors are driving valuation differences from year to year.
The Importance of Documentation
Well-documented processes are the strongest safeguard against fiduciary risk. Trustees should maintain records including:
Engagement letters with financial advisors
Management certifications of data accuracy and completeness
Marked-up drafts of valuation reports with trustee notes
Written responses from financial advisors to trustee inquiries
Meeting minutes and final reports with completed review checklists
Best practice is to retain documentation for a minimum of six years, which aligns with the statute of limitations under ERISA for most fiduciary claims.
Conclusion
Valuation reports represent more than numbers on a page—they are a central element of ESOP fiduciary duty. Trustees who adopt a rigorous, structured review process and maintain thorough documentation not only meet regulatory expectations but also reinforce the credibility and sustainability of employee ownership.
By approaching valuation review as an active, professional exercise—marked by diligence, prudence, and inquiry—trustees fulfill their obligations and safeguard the interests of employee-owners.