In an earlier blog post, we describe the duty for a ROBS plan to redeem stock of the corporation at a fair market value. This post outlines the process for getting a good FMV appraisal.
The ROBS plan fiduciaries (that’s you, ROBS owner!) are required by law to manage the plan solely for the purpose of providing the plan benefit to its participants. The fiduciary also has a duty to make any plan decisions with the utmost care. When you get an appraisal of the corporation’s value for purposes of pricing a transaction in the ROBS shares, this duty of care requires that the appraisal be performed by a qualified third-party professional and reported in a written document.
Note that it is you as the fiduciary, not the appraiser, who must take ultimate responsibility that the appraisal provides a reliable fair market price for the ROBS stock. The appraiser provides expert advice, but the fiduciary reviews and accepts (or not) the advice. Courts of law have found that “a pure heart and an empty head” are not enough to satisfy the fiduciary duty.
Keep these pointers in mind when working with an appraiser. Don’t be afraid to ask questions:
- Expert’s Qualifications. Require the appraiser to provide their education and experience in valuing stock of a closely held corporation.
- Cooperation and Transparency. Provide all requested information to the appraiser.
- Complete Picture. Do not remove unfavorable data from the financials you provide.
- Review the Appraisal. When you receive the appraisal report, read it. Test the assumptions, verify that the conclusions are consistent with the analysis, make sure there are no internal inconsistencies. For example:
- Do you agree with the multiple of EBITDA (earnings before interest, taxes, depreciation, and amortization) used by the appraiser?Is it realistic? Look out for overly pessimistic or optimistic projections. Make sure the narrative in the report agrees with the math.Make sure the appraisal properly accounts for any risk to the company.
- Make sure comparable sales really are comparable.
The government regulators and the courts will look at the above facts when evaluating the validity of an appraisal of a corporation as a basis for pricing a transaction in Qualifying Employer Securities, i.e., the ROBS stock.
As with any fiduciary decision, be sure to document the deliberation process behind your stock pricing determination, including your review and acceptance of an appraisal report.