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ESOP Advisor - March 2018

 

Control v. Non-Controlling Level of Value

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The discussion regarding the concluded level of value is centered on a topic that is fantastically clouded because of what the DOL has proffered in recent investigations and court cases. In any event, we cannot ignore the Fair Market Value ("FMV") standard of value, i.e., hypothetical willing buyer and hypothetical willing seller.

A discount for lack of control ("DLOC") for a controlling interest, or not adjusting owner/officer compensation to market, is not only counter-intuitive but is potentially in violation of FMV and professional standards. And then, of course, we find ourselves creating a special form of ESOP FMV which is not supported by professional standards or governmental regulations, including those of the DOL. Perhaps there needs to be more board/management/trustee interaction prior to encountering a situation where the CEO or president can simply pay him/herself a hefty bonus or increase their own compensation, even if it is completely warranted; in other words, setting parameters proactively to reward management for their contributions in increasing value to the owners/participants.

The accepted levels of value in the business valuation profession look something like this:

The Use of Projected Financial Information in ESOP Valuations

*Source: AAML Annual Meeting - November 2-5, 2016 Renaissance Hotel, Chicago, IL

This is certainly not the only circumstance where FMV is applied differently for the U.S. government.

And are we losing the forest for the trees? Are we, as valuation professionals, supposed to look at this differently for transactions versus annual updates for purposes of calculating participant value for redemptions?

Stay tuned for additional commentary in our June newsletter.

 
Related
Kenneth Pia, Jr, Partner-in-Charge, Valuation & Litigation Support

Partner-in-Charge
Business Valuation Services
Valuation & Litigation Support
New Haven, CT
 






 
 
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