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Specializing in companies with annual revenues ranging from $500,000 to $350,000,000, Robert Hetsler provides independent ESOP Valuation services for all stages of a company’s ESOP planning and administration.


Fairness Opinions

What is a fairness opinion?
A fairness opinion should be an integral part of most – if not all - ESOP transactions. The fairness opinion is a third-party assessment that offers insights and conclusions as to whether the terms of the ESOP purchase or sale are equitable to all participants. A fairness opinion considers all material conditions, facts, circumstances and intangibles surrounding a proposed ESOP transaction. This information is then analyzed and synthesized to determine the impact the transaction will have on each interested party.

The final fairness opinion will usually be in letter form, and it will summarize the author’s views on various financial aspects of the proposed transaction as those elements relate to each party. Although the fairness opinion itself may be less than one page long, the supporting research and documentation supporting the opinion is usually substantial.

Does an ESOP transaction require a fairness opinion?
Any entity considering an ESOP transaction would be well served to obtain a fairness opinion before the proposed transaction is concluded. Although not required by law, from a fiduciary and liability perspective, obtaining a fairness opinion is prudent to ensure that decision makers have adhered to the business judgment rule and met all fiduciary obligations. Obtaining a fairness opinion ensures that every major stakeholder understands the impact of the ESOP transaction on their vested interests.

Is a fairness opinion the same as a valuation?
Business valuations focus exclusively on determining an objective economic value of a company or business. Such valuations may be used in a variety of contexts, including sales, dissolution proceedings, or to establish partner ownership interests. Business valuations traditionally focus exclusively on the immediate economic elements of a proposed transaction.

Fairness opinions, on the other hand, extend beyond this narrow economic focus and take into consideration factors unique to the parties directly involved in the transaction. In other words, fairness opinions focus on more than just hard numbers in a hypothetical vacuum. Fairness opinions take real world influences into consideration, too.

When should a fairness opinion be obtained?
If any aspect of a proposed transaction could be controversial to any interested party, then it is prudent to obtain a fairness opinion. The fiduciary responsibilities of an ESOP trustee cannot be overstated.

Any of the following situations may give rise to the need for a fairness opinion. While this list is not exhaustive, it is a good starting point when considering whether a fairness opinion should be obtained.

•    Termination of an ESOP
•    Liquidation of the ESOP company
•    Issuance of stock in a new ESOP
•    Sale of most (or all) of an ESOP company’s assets
•    Major changes to the ESOP plan itself
•    Modification of the corporate structure of the ESOP company
•    Recapitalization of the ESOP company
•    Purchase or sale of a major business asset that is beyond the normal scope of the ESOP company’s business activity
•    Stock redemption by non-ESOP shareholders
•    Creation of new shareholder agreements that increase the company’s liabilities – now or in the future
•    Significant modification in financial practices of the ESOP company, including compensation changes

What situations suggest the need for a fairness opinion?
A fairness opinion should be considered in any proposed action that may be deemed controversial, involve decisions or actions that are outside the ordinary scope of business, or that raise a potential conflict of interest. While the following list is not exhaustive, it highlights the most common transactions where a fairness opinion is appropriate.

•    The ESOP trustee is selling stocks to the ESOP
•    The company conducts substantial business with businesses owned or controlled by those selling stocks to the ESOP
•    The company is experiencing significant changes (declining revenue/profitability, changes to senior management, termination of major product lines, etc.) at the time the ESOP transaction is proposed
•    The company is issuing any equity-based compensation (e.g. stock options) that may adversely dilute the ESOP owners’ ownership position
•    The proposed financing dilutes ESOP shareholders’ positions (e.g. warrants)
•    Shareholders, directors or trustees don’t fully understand whether the transaction is fair to all parties
•    The Board of Directors requires more information on the impact of the proposed ESOP transaction and future obligations of the company
•    The valuation is not thorough, complete or compliant with generally accepted standards
•    Stocks issued to the ESOP involve the use of sale proceeds for non-recurring payments to shareholders and/or executives not associated with the ESOP
•    Financing doesn’t reflect market rates, or the ESOP transaction is unable to achieve independent financing
•    The ESOP company has declined to acknowledge a legitimate bid or otherwise engage with a bona fide purchaser
•    The proposed ESOP transaction compromises the company’s ability to secure operating or growth capital
•    The ESOP company is being sold:
o     to a buyer who intends to retain anyone with a direct interest in the ESOP (e.g. company executives, trustees, board members)
o    to a related party or buyer with a prior or ongoing relationship with the company (potential conflict of interest)
o    for value greater than that which directly benefits shareholders on a pro rata basis
o    and no other efforts have been made to secure competitive bids or identify strategies to maximize value or achieve liquidity
•    The proposed ESOP transaction includes a valuation that:
o    relies on historical compensation modifications or other business practices,
o    is different than stock valuations specified in shareholder agreements (e.g. buy-sell, etc.)
o    requires high levels of debt financing
o    differs significantly than the value obtained in recent stock appraisals or at which actual offers for the stock have occurred

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Robert G. Hetsler, Jr., J.D.,CPA*,CVA,CFFA,FCPA,CFF

Preparing ESOP Valuations Nationwide
We have offices Nationwide (see contact pagefor locations)
10151 Deerwood Park Blvd
Building 200, Suite 250
Jacksonville, FL 32256

Phone: (904) 564-1000
FAX: (904) 531-3003
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*Licensed in Virginia