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What Is an ESOP?

November 21, 2012

An Employee Stock Ownership Plan (ESOP) is an employee benefit plan that gives employees ownership of shares in the company for which they work. When an employee leaves the company, the company must buy the shares back at their full market value. To determine the market value of the stock, companies that offer ESOPs must have an annual valuation.

A company may set up an ESOP as a way to reward employees – shares are typically given to an employee rather than purchased by an employee. Companies may also hope that by making employees owners, they will show a stronger work ethic and greater dedication to their jobs. Research has shown that an employee who has a stake in his or her company has a more positive attitude toward that company, which in turn, affects the company’s bottom line.

When a company is considering an ESOP, conducting a valuation is one of the first things it should do before implementing the plan. If it turns out that the value is higher than expected, the amount the company would have to pay to departing employees may be too high to afford. To determine the company’s value, an appraiser will consider the company’s cash flow, profits, goodwill, and the value of the company’s assets. Other factors that will be taken into consideration are market conditions and comparable company values.

The NEBB Institute endorses and strives to observe the highest standards of professional ethics to preserve the public trust inherent in the professional appraisal practice. The Institute provides initial and monthly comprehensive education, ongoing support, and a dynamic international network, and certifies professionals in the art of machinery/equipment appraisal and brokerage.

By: NEBB Institute

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