ESI Equity FAQs

ESI Equity

  • ESI was founded by Scott Miller in 1993. Current Officers/Managing Partners are Sandra Paavola, Craig Olinger, ToniLynne Kildow, and Scott Miller. ESI Equity currently has a total staff of 15.

  • Our clients generally operate in the middle market in a variety of industries and are seeking advice on business transitions strategies.

  • ESI serves clients in a number of industries. We, too, come from industry and understand the underlying operational and management forces faced by business owners and managers. These industries include:

    • Construction
    • Manufacturing
    • Distribution
    • Professional Services
    • Retail
    • Environmental Services
    • Communications and Technology
    • Hospitality
    • Transportation
    • Finance and Insurance
    • Agriculture and Food
    • Medical and Healthcare

  • The professionals at ESI represent one of the largest and most respected valuation teams in the nation; clients in over forty-four states appreciate the national perspective we bring to transition planning, valuation and ESOP related issues. Our combination of professional credentials and senior management industry experience set ESI apart. Each assignment is vetted through an internal review process and conforms to various standards including: USPAP, NACVA, ASA, and SSVS1.

Business Transition Planning
(also called Succession Planning)

  • It depends on your situation. You could sell your business to a family member, a competitor, inside managers, all of your employees through an Employee Stock Ownership Plan (ESOP), or a private equity group. Each strategy has advantages and disadvantages based on the timeline and overall goals of the business owner.

  • The well-prepared business owner has a wide range of transition options to consider. The goals of the owner may dictate the timing and exit strategy from the business. Generally, the sooner that planning begins, the more options available to meet overall owner objectives.


  • The technical definition of an Employee Stock Ownership Plan is a tax qualified defined contribution employee benefit plan of deferred compensation intended to be primarily invested in the securities of the employer (plan sponsor). More simply, an ESOP is a vehicle to provide an equity interest to employees in the securities of their employer.


    Unlike other qualified employee benefit plans, an ESOP may borrow money to acquire company stock. In turn, the contributions are generally tax deductible.

  • In the case of a leveraged buyout, debt repayment is made using after-tax dollars. With an ESOP, principle payments are tax deductible to the company providing a decisive tax advantage of the overall transaction cost.


    On the selling shareholder side, two benefits are derived. First, financially, it is possible to defer taxes on the sale of the stock: a seller can elect a 1042 tax deferral if the company is a C Corporation and the transaction size is at least 30% of the outstanding securities. The second benefit comes in controlling the timing of exit. For the seller that does not want to exit immediately, as is often the case with a 3rd party sale, an ESOP provides a longer term exit strategy for the selling shareholder.

  • ESOP shares are held in a trust established for the benefit of plan participants; the shares are not distributed directly to employees, but are controlled by the plan Trustee. As a result, the plan trustee votes the shares. Under certain circumstances such as the sale or liquidation of the Company, the ESOP trustee may be required to pass-through the vote to the participants.

  • Corporate governance is often an area questioned with ESOPs. The ESOP trustee is appointed by the board of directors through a board resolution. When the ESOP holds a controlling interest in the Company, the board is ultimately controlled by the trustee’s vote because the trustee elects the directors. When a controlling interest ESOP is established, an agreed upon board structure is put in place to balance the corporate governance objectives of the Company, the ESOP trustee, and any other minority shareholders.


  • Unlike a public firm that is traded on open, public markets dictating the price of its securities, a privately held business may not know the value of its stock. There are many reasons for valuing a company including the sale of a business, annual ERISA requirements, gift and estate tax planning, buy and sell agreements between shareholders, mergers and acquisitions, divorces, and insurance requirements. The purpose of the valuation impacts both the standard of value (e.g., fair value, investment value, strategic value, or fair market value) and the approach used to determine a value or a range of values.

  • The most widely known standard of value is Fair Market Value (FMV) as defined by the IRS and other government bodies. FMV represents the price at which the property will exchange hands between a willing buyer and a willing seller; neither being under any compulsion to buy and sell, and both having reasonable knowledge of the relevant facts. FMV assumes a hypothetical transaction, a financial buyer, and terms of cash. The concept of FMV may also include producing a reasonable rate of return to the investor in a private company given the risk characteristics of that specific company.

  • A controlling interest in a business is typically worth more than a minority position. There are a number of prerogatives that accrue to the benefit of a controlling shareholder including: establishing company policies, control of company assets, shareholder voting and selection of the board of directors, setting compensation, amending company by-laws and articles of incorporation, and determining dividend payment policies. Due to such benefits, there is an enhanced certainty regarding use of company resources, which enhances value. As such, the investment community generally assigns a higher value to a controlling interest above a minority interest in the same company.

  • The principal objective of a business valuation is to parallel how hypothetical investors would determine whether to acquire an interest in a firm. As such, determining the economic return that is likely to accrue to the investor is paramount to estimating value. There are three basic approaches used to value a business: income approach, market approach, and cost approach. Depending on the nature of the valuation assignment, some may be more appropriate than others. Each of these approaches considers financial factors derived from the company. In addition, financial, market, and economic conditions of the firm compared to other similar companies in the same or similar industry are considered.

  • A valuation process includes both quantitative and qualitative analysis. Our goal is to understand each company’s products and services, financial results, market conditions and competitive landscape, and management practices. Through diligent analysis and interactions with management we are able to access critical components for the valuation process. If the assignment is to determine the Fair Market Value all relevant guidance from Internal Revenue Service Ruling 59-60 and other regulations are considered.

  • An income approach relates future economic benefits with associated risks to the overall opinion of value. The estimated future returns are often based on market and economic conditions of the firm compared to other similar companies in the same or similar industry. Typical methodologies include a discounted cash flow and a capitalization of cash flow.

  • The market approach to valuation is based on the principal of substitution, namely that one will pay no more for an item than the cost of acquiring an equally desirable substitute. A company’s financial performance is compared against public companies and multiples derived from their public stock prices to determine value. Additionally, multiples from acquisitions of similar businesses can be used as a proxy for value. Thus, the value is determined based on prices that have been paid for similar items in the relevant marketplace.

  • The most common cost approach, referred to as an adjusted net asset method, is an assessment of a company’s balance sheet whereby assets and liabilities are adjusted to their fair market value. This method is commonly used for holding companies and can be utilized when a firm’s assets prove more valuable than the employment of those assets.

  • The valuation of stock in a private company requires the assessment of the degree of marketability of the shares in question. Unlike public company securities that have a liquid and ready market, most closely held stock has an absence of marketability. Research supports the view that this lack of marketability of privately held securities is a pronounced negative for investors and has a significant impact on value for which an investor must be compensated. This is referred to as a discount for lack of marketability (DLOM).