An ESOP plan trustee must ascertain annually the fair market value of plan shares. This is a fiduciary responsibility carried out by obtaining a valuation report from a qualified appraiser and ensuring the accuracy and completeness of this report before it is used. These slides are from an NCEO presentation in April 2015 that addresses what the trustee should be looking for when the appraiser submits his or her annual valuation report.

1. Presented by:
Employee Ownership Conference
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The Valuation Report Checklist:
What Should ESOP Trustees Be Looking For?
John Johnson, CFA
John E. Johnson, LLC
209.369.1451
john@johnejohnson.com
Daniel N. Janich
Greensfelder, Hemker & Gale, P.C.
312.345.5003
dnj@greensfelder.com

2. Introduction
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• Basic Purpose of Annual ESOP Valuation
Report
• Fiduciary Duties of ESOP Trustee
• DOL Guidance: Regulations, Agreements &
Case Law
• Issues for Trustees to Address When
Examining Annual Valuation Reports
• Review Fundamentals Addressed in Annual
ESOP Valuation Reports

3. • ERISA requires ESOPs to pay no more
than “adequate consideration” when
investing in employer securities.
• This means ESOP trustees and fiduciaries
must determine in good faith the fair market
value of employer securities.
• IRS & DOL guidance for this determination.
Basic Purpose of ESOP Valuation Report
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4. • ERISA: Trustee Fiduciary Duties
• Sole interest of participants -Loyalty
• Prudence
• Determine annual value of ESOP shares
• Hire independent valuation advisor
• DOL Fiduciary Process Agreement
• Best Practices Checklist for Selection of
Valuation Advisors and Review of Valuation
Reports
Should a Trustee Be Concerned About
What’s In A Valuation Report?
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5. • Fiduciary Duties
• Personal Liability – ESOP Litigation over
Valuation Issues
• Best Practices Checklist from DOL
Fiduciary Process Agreement
• Document Trustee Review Process
Thoroughly
ESOP Trustee Must Scrutinize Annual
Valuation Report
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6. • Qualifications and Independence
• What are your professional credentials?
• Can you provide professional references?
• Length of experience conducting ESOP
appraisals?
• Number of annual ESOP valuations
performed previously?
• What is internal process to review work?
• Any other work performed for company?
ESOP Trustee Questions for Appraiser
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7. • Any other business or personal
connections with the company?
• Confirm engagement with ESOP Trustee
• Confirm Valuation Report to be addressed
to ESOP trustee
• Check appraiser’s previous involvement in
litigation involving his valuations.
ESOP Trustee Questions for Appraiser
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8. • Guide to ESOP trustee in reviewing and
assessing the valuation report.
• Helpful to ESOP valuation practitioners in
conducting proper analysis for valuation
report
• Helpful to ESOP administrators, attorneys
and accountants to assess soundness of
ESOP valuation report.
Multiple Purpose of Annual Valuation
Report Checklist
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9. • What Issues Must the Appraiser Address in
Conducting Due Diligence and in
Preparation of ESOP Valuation Report?
Contents of Annual ESOP Valuation
Reports
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10. Identification of the Client
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• The bottom line is that the appraiser works
for the trustee
• The company can pay the bill

11. Basic Engagement Information
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• Correct company
• Correct appraisal date
• Correct basis of value – minority or
MAJORITY
• Correct definition of value
• Correct purpose – transaction or annual
update

12. Basic Company Information
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• History
• Industry
• Services
• Competition
• Management

13. Economic and Industry Information
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• Does the report include information about
the economy?
• Does the economic information relate back
to the subject company? If not, then what
value is it?
• Is the industry information correct? It may
be included in the market and competition
discussion.

14. Financial Statement Analysis
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• First – Is it correct?
• Second – Is it relevant?
• Third – Do you understand it?
If you answered No to any of these questions,
contact your appraiser.

15. Selection and Application of Approaches
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• The Approaches – Cost, Market and
Income
• Do you understand the explanations in the
report?
• Do you think they apply?

16. • Should the value of your company be
based on the value of its assets?
Cost Approach
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17. • Does it make sense to compare your
company to private companies?
• Should your company be compared to
public companies?
• Is the math correct?
• Are the adjustments for lack of
marketability, control or lack of control
correct?
If it is unclear talk to your appraiser.
Market Approach
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18. • Are the income sources clearly defined?
• Are you able to understand the descriptions
in the report?
• Do you understand and agree with any
income/expense adjustments?
• Do you understand the discount rate and/or
capitalization rate?
Income Approach
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19. • Were projections used? Who made them?
Do they reflect the company’s prospects?
• Is the level of earnings consistent with the
level of value – minority or MAJORITY?
• Are the adjustments for lack of
marketability, control or lack of control
correct?
Income Approach Continued
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20. • Is the reason for any discount clear?
• Was the level of the discount impacted by
the ESOP?
• Are the source of data for the discount
disclosed?
Discount for Lack of Marketability
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21. • Is the reason for the application clear?
• Should it have been applied at all?
• Are the sources of the data disclosed?
Control Premium or Minority Discount
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22. • Are the indicators on a consistent basis –
minority or MAJORITY
• Does the overall result make sense given
the indicators from the various
approaches?
• Does it pass your smell test?
Valuation Reconciliation
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23. • Qualifications of the appraiser
• Statement of independence
• Assumptions and Limiting Conditions
• Is the report free of typographical and math
errors?
• Are the methods and approaches
consistent with prior appraisals?
Other Items
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24. Questions
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John Johnson, CFA
John E. Johnson, LLC
209.369.1451
john@johnejohnson.com
Daniel N. Janich
Greensfelder, Hemker & Gale, P.C.
312.345.5003
dnj@greensfelder.com