Communicating ESOP Company Valuation and Values
At the 2024 Employee Owned Las Vegas Conference, Jennie Msall, Director at Ventura Trust Company, joined a panel of experts to discuss how ESOP companies can better communicate their valuation and engage employee-owners in building long-term value. Her presentation emphasized that understanding valuation is not just about numbers—it’s about creating a culture of ownership and accountability.
Why Valuation Communication Matters
Valuation reflects a company’s performance, risk profile, and future potential. For employee-owners to be truly invested in the success of the ESOP, they need to understand how the company is valued, what drives the share price, and how their everyday actions influence that value.
The Valuation Process Explained
The valuation process involves three key players. The company provides financial and operational data. The ESOP trustee hires and oversees an independent appraiser, who calculates the company’s value and share price. The appraiser works for the trustee—not the company—and uses a combination of methods, including market comparisons, discounted cash flows, and, less commonly, net asset value.
What Drives Company Value
Two main factors determine a company’s value: cash flow and risk. Consistent and growing cash flow increases value, while lower risk—whether internal (like strong leadership and customer diversity) or external (such as favorable economic conditions)—also boosts valuation. Ideally, companies should aim to improve cash flow and reduce risk.
How Employees Influence Value
Employee-owners play a direct role in shaping company value. By increasing sales, reducing waste, improving efficiency, enhancing customer satisfaction, and supporting innovation and cross-training, they help grow cash flows and reduce risk. These contributions can ultimately lead to a higher share price.
Making Share Price Meaningful
Because share price is a lagging indicator that reflects past performance, it’s important to keep employees engaged with regular updates on current progress. Sharing financial goals, operational metrics, and business unit performance in real time helps employees see how their efforts connect to the company’s success. These updates can be delivered through town halls, team meetings, dashboards, or written reports.
A Practical Example: SchoolBuilders, Inc.
In a fictional case study, SchoolBuilders, Inc. saw a 10% increase in share price after addressing project delays, stabilizing costs, and strengthening its workforce. The company’s strong backlog and growth pipeline also contributed to the improved valuation. This example illustrates how increasing cash flow and reducing risk can drive measurable results.
Final Thoughts
Valuation may be complex but communicating it doesn’t have to be. Employees don’t need to be experts in finance, they just need to understand how their work contributes to the company’s value. Regular, transparent communication builds trust, fosters engagement, and strengthens the culture of ownership. As Jennie Msall put it, “Dedicated employee-owners who take responsibility for the business’s success are the foundation for building long-term value.”