How to Review a Valuation Report: A Guide for ESOP Trustees
Valuation reports are an essential part of administering and governing employee-owned companies. The trustee is ultimately responsible for using the valuation report to determine the share price of ESOP stock. management to grow share price over time. At the 2025 NE Spring Conference, Jennie Msall, Director at Ventura Trust Company, offered a detailed guide to help ESOP trustees approach these reports with the diligence and confidence required of their role.
Trustees are responsible for setting the ESOP stock price at least once a year and are held to the “prudent expert” standard. This means they must act with the same care and expertise as a professional fiduciary. Their responsibilities include selecting qualified, independent appraisers, ensuring those appraisers have access to accurate and complete information, and actively reviewing and questioning the assumptions used in the valuation. A valuation is not a rigid formula but an informed opinion of a company’s worth. It reflects the relationship between expected future returns and the risks associated with achieving them. Key considerations include cash flow (EBITDA), growth potential, internal and external risk factors, and both tangible and intangible assets.
Valuations are required annually for ESOP administration, during ESOP transactions such as stock purchases or sales, and in cases of corporate recapitalizations or plan terminations. These reports are increasingly scrutinized by regulators like the Department of Labor and the IRS, as well as by auditors, lenders, insurers, and private litigators. As a result, trustees must ensure that the valuation process is well-documented, transparent, and defensible.
To fulfill their duties effectively, trustees should be actively involved throughout the valuation process. This includes participating in the due diligence process, reading the entire draft report, challenging assumptions, verifying facts, comparing findings to previous years, and meeting with the appraiser to discuss conclusions. Every step and decision should be clearly documented. When reviewing a valuation report, trustees should examine whether the methods and assumptions are consistent with prior years, whether the financial projections are realistic and supported by data, and whether the discount rate accurately reflects market and company-specific risks. They should also assess whether the terminal value is calculated using appropriate methods, whether the comparable companies used in the market approach are truly comparable, and whether adjustments for cash, debt, working capital, and equity incentives are properly handled.
Common pitfalls in projections include overly optimistic forecasts, weak or unsupported assumptions, and a lack of input from departments beyond finance. Trustee should track actual results against projections, as well as understand the company’s process for putting together their forecast., Best practices in building a forecast include scenario planning, sensitivity analysis, and involving cross-functional teams in the forecasting process. Trustees should also pay close attention to risk factors such as revenue and EBITDA trends, the accuracy of past forecasts, debt levels, management depth, customer and product diversification, and regulatory or technological risks.
While peer reviews are not second opinions, they can be a helpful tool to the trustee when there are major changes in business operations, unexplained shifts in valuation conclusions, or significant changes in methodology.
Ultimately, reviewing a valuation report is not a passive task. Trustees must engage fully, ask the right questions, and ensure the valuation accurately reflects the company’s condition. By doing so, they uphold their fiduciary duty and protect the interests of employee-owners.