Business Valuation Review Volume 41: Issue 1

The leveraged Employee Stock Ownership Plan (ESOP) structure was created by US Congress to enable American workers to gain an equity interest in their companies without using their own funds. A critical component in the financing of leveraged ESOP transactions is a “warrant,” which enables corporate sponsors of ESOPs to access the financing necessary to facilitate purchases of company stock by ESOPs. Warrants also afford substantial benefits to ESOPs by providing downside risk for ESOP participants, freeing up cash for more productive uses than servicing interest on debt and aligning all corporate stakeholders' interests toward the common goal of increasing equity value.

Recently, however, the US Department of Labor (DOL) has taken the position that warrants necessarily reduce the fair market value of a subject company's equity in an ESOP transaction. This position, which would discourage ESOP formation, is contrary to both the “fair market value” standard that governs ESOP transactions and the DOL's long-held position on this issue. By helping to clear misconceptions around the use of warrants in leveraged ESOP transactions, we hope to contribute to the continued proliferation of ESOP ownership, resulting in a broader-based participation in wealth creation among American workers.

Starting at the end of 2020 and continuing through 2021, numerous publicly traded companies saw their shares became “meme” stocks often related to trading activity sourced to the Reddit board WallStreetBets. Most market observers think of the GameStop Corp (NYSE: GME) saga as the most infamous example of a meme stock, but many other stocks have been come to be known as meme stocks. If not careful, appraisers can encounter issues in both the income approach and the guideline public company method if they were to include a meme stock in developing an estimate of beta or selecting valuation multiples. This article covers an overview of the GameStop saga and illustrative issues using GME stock prices in an appraisal, a discussion regarding testing the efficiency of GameStop shares using the Cammer Factors, listing and returns analysis of other stocks labeled as meme, and discussion of various methods for appraisers to identify whether a stock has become a meme stock and suggestions on how to minimize the impact.

The dividend growth model, sometimes called the dividend discount model or discounted cash flow model, is a commonly used tool for estimating the cost of equity capital, particularly in the context of utility rate setting and unitary appraisal. Although the assumption of constant growth in perpetuity is almost never realistic, the constant growth version of the model is still commonly used in practice. However, given modern computing technology, there is no reason not to use the general dividend growth model when estimating the cost of equity. If the constant growth assumption is appropriate in a particular case, it can simply be substituted into the general model. If constant growth is not an appropriate assumption, which will almost always be the case in practice, then the general model should be employed rather than trying to manipulate the constant growth model.

PURPOSE

Business valuation providers and users benefit from common understanding of terms with clearly established meanings and consistent application throughout the profession. To this end the following societies and organizations have worked collaboratively to compile definitions for the terms included in this Glossary:

ASA - American Society of Appraisers
CBV Institute - Chartered Business Valuators Institute
RICS - Royal Institution of Chartered Surveyors
TAQEEM - Saudi Authority for Accredited Valuers

This Glossary updates the International Glossary of Business Valuation Terms originally published in 2001.

SCOPE

This Glossary was developed as part of ongoing efforts to harmonize definitions for terms used

From the Editor

Warranting Further Discussion: Why the Use of Financing Warrants in ESOP Transactions Benefits American Workers

Beware of Meme Stocks

Let's Get Real About the Dividend Growth Model

Book Review

International Valuation Glossary — Business Valuation

PURPOSE

SCOPE

From the Chair

Do you know the history of the ASA?

Volume 41, No. 1 — Complete Issue

From the Editor

Customer Concentration: Good, Bad, or Ugly?

From the Chair

Delaware Valuation Decisions, 2021 to 2024

Volume 44, No. 1 — Complete Issue