Compensation and Valuation Considerations in Closely Held Company Stock Sales to an ESOP

Abstract

Closely held company owners may decide to sell their equity interests for many reasons, including liquidity needs, retirement planning and wealth diversification. It is not uncommon for the selling stockholders to sell some of their stock to an employee buyout group through an employee stock ownership plan (ESOP) and to also sell some of their stock to other buyers. These other buyers could include key executives, key suppliers, customers and financing sources. These other buyer sales are often intended to recruit, retain or reward these parties. The stock sale transactions to the ESOP often take place at a price different from the stock sale transactions to the other buyers. This article summarizes the generally accepted approaches to the valuation of closely held company stock. It also explains many of the reasons why the ESOP versus non-ESOP stock sale transactions may take place at different prices.