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community bank and ESOP valuations

What you need to know: ESOP and Community Bank Valuations in the era of Covid-19

Whatever your plans were for 2020, it’s a safe bet that COVID-19 changed them. Its physical and economic impact has been felt literally around the world, and it will continue to have a ripple effect on businesses for months and years to come.

The valuation industry is no exception. Most of the “business for sale” market dried up overnight. At this moment, companies across the board (with the exception of grocery chains and hand sanitizer manufacturers) simply aren’t worth what they once were. Owners have their hands full simply trying to find ways to pay their bills and meet payroll. Prospective buyers under “stay-at-home” orders are limited in their ability to perform due diligence, so many of them are choosing to push pause until things return to “normal.”

There is light at the end of the tunnel, though. Eventually, governors across the country will slowly begin to reopen their state economies, and business owners will be able to start getting back on their feet.

If you were considering a valuation prior to the COVID-19 pandemic, you’re probably wondering how it will affect you now. So we’d like to help shed some light on what you can expect going forward.

Our valuations tend to focus on four main areas:

  • ESOPs
  • Community Banks
  • Gift/Estate Taxes
  • Business Transactions

Today, we will look specifically at ESOPs and Community Banks:

ESOPs

ESOP plans require a year-end value. Even though we are well into Q2 2020, many companies still do not have their 2019 valuations done yet. Normally, you could safely base value on what was “known and knowable” on December 31, 2019. Although it might be difficult in times like these, the appraiser needs to essentially put blinders on and only consider what was happening at the valuation date.

No one could have foreseen the sudden total shut-down of our entire national economy, and business values have fluctuated wildly. Some companies have had zero revenue, others have barely noticed a difference, and a few have made more money than they ever thought possible.

COVID-19 is an example of what is known as a “subsequent event”–since it happened after the December 31 year-end date. These types of events are often noted in valuation reports but not reflected in the actual valuation. But what if the dramatic difference in value from 2019 to today would negatively affect the price of ESOP shares?

There is a possible solution. In order for ESOP administrators to properly make decisions, the ESOP will likely need a mid-year valuation update. However, it is important to review the ESOP plan document to see whether or not it allows for interim valuations in the light of subsequent events. If it doesn’t, the plan sponsor may want to consider amending the plan to allow for interim valuations.

COMMUNITY BANKS

At the beginning of 2020, the banking industry was enjoying growth and prosperity unlike anything it had seen since the recession in 2008. But in a few short weeks, it all came crashing down.

Because businesses everywhere are forced to rethink the way they operate in response to COVID-19, the financial sector must shift how it functions as well. Everything must be evaluated and reinvented if necessary: on-site interactions, how employees perform their duties, how customers access and manage their finances, and more.

We perform valuations for many private community banks. As with ESOPs, these valuations are typically done as of year-end. But in the first 4 months of 2020, publicly traded banks are down about 40% since year-end 2019. That is a very staggering and significant decline, since market data on those banks is used as a basis to value private banks. This presents dramatic implications for the appraisal of community bank stocks, so it is important to discuss those implications with your appraiser.

While we fully expect the U.S. economy and markets to rebound in time, community banks should be prepared to ride out the ensuing financial turbulence and do everything they can to remain solid. One resource we recommend banks look at now is the Statement on Pandemic Planning released by the Federal Financial Institutions Examinations Council. Taking wise action now will ensure stability and accurate valuations in the future.

In our next post, we’ll examine the impact on Gift/Estate Taxes and Business Transactions.

We know you have concerns about how this pandemic and economic crisis are affecting your business. Southard Financial is ready to come alongside you and your business to help navigate whatever lies ahead. Despite the current pandemic, we remain open and fully operational. All of our professionals are working remotely. Our computers and servers are secure and have the appropriate protection to keep your information confidential. So don’t hesitate to contact us as the need arises at 901-761-7500 or online at southardfinancial.com.

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