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Factors that Affect ESOP Valuation

Business valuations are calculated a number of ways, as outlined in our business valuation blog post here. What’s important to note, though, is that typically an owner who is selling his or her business will want to maximize value.  Our goal with this post is to break down the factors that make the largest impact to company valuation.Recurring revenue / subscription revenue.  Recurring revenue gives confidence to the longevity of the business.   If there is any way to have recurring / subscription oriented revenue, this will command a higher valuationSEE DETAILS

How to Calculate ESOP Valuation

Valuation, as defined in a dictionary, is an estimation of something’s worth, usually carried out by a third party appraiser.   In terms of a business, valuation is the dollar amount that a third party acquirer will pay for ownership of a business.  An unofficial but broadly accepted rule is that something is worth what someone else will pay.  This is the underlying principle behind valuation calculation, and so the next factor that is considered is:  who is the buyer? Buyers will value a business differently based on their intended purpose for it.SEE DETAILS

What is an ESOP?

Simply stated, an ESOP, or employee stock ownership plan, is a qualified defined-contribution benefit plan comprised of company stock, held by shareholders at a company (which is usually all vested employees).  For the purposes of this website, however, an ESOP is a way to sell your company to your employees, enabling all employees to become shareholders in the company, and selling shareholders to obtain liquidity.ESOPs are a great way to align the financial incentives and rewards of employees with those of ownership, as all employees will hold shares in theSEE DETAILS

Private Equity Exit

A private equity exit is the sale of your company (or a company) to a private equity (PE) firm.  PE firms are usually partnerships that are comprised of many shareholders that have pooled investment dollars, invested them into the acquisition and growth of privately held companies, and have a very specific goal of beating the average annual returns of the stock market index, which are typically in the 7-8% per year range.PE firms consolidate around industry verticals and use a variety of strategies to produce returns on investors dollars.  TheSEE DETAILS

Sale Proceeds & Charity

You sold your company — congratulations!  What now? Surely something fun and celebratory, as you certainly deserve it. At some point during the dust settling process, you’re likely to be hit by the gratitude bug.  Generally, people fall into one of three categories: Planned givers — these folks will give off the top and usually have faith / religious reasons for doing so.  They’ll be planning to give away a portion of their proceeds, usually a percentage. Non-givers — these folks won’t give.  They earned their money and no one gave itSEE DETAILS

The ESOP Exit

An ESOP exit, in the simplest sense, is a sale of a company to that company’s employees.   The mechanics of how this all works, as well as how it all operates after the fact, are outlined below, and for the sake of simplicity an ESOP exit is a true sale of one business to another, with the typical outcomes expected (liquidity, new ownership, etc).Now, a more detailed explanation of this is as follows:  A sale of the company to its employees is a classic business acquisition transaction where there areSEE DETAILS

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