Final answer:
The value of non-tradable securities for ESOP contributions is determined by an independent appraisal which establishes a fair market value considering multiple factors like financial health, earnings potential, and relevant restrictions on the securities.
Step-by-step explanation:
If securities are not readily tradable, the value of the security for the purposes of an Employee Stock Ownership Plan (ESOP) contribution is usually determined by an independent appraisal. When stocks are not publicly traded, their value cannot be determined by market forces, so companies hire independent valuators who assess the stock's value based on several factors including the company's financial health, future earnings potential, and the book value of the shares. These valuators must follow specific guidelines and methodologies, such as those set forth by the Internal Revenue Service (IRS), to provide a fair market value of the securities at the time of the ESOP contribution.
It's also important for the valuation professionals to consider any buy-sell agreements or restrictions on the securities which might affect their value. In some cases, discounts are applied to these types of non-marketable securities to reflect lack of marketability and control. This is accounted for in order to ensure that ESOP participants are contributing and receiving shares whose value is as accurate and 'fair' as possible, reflecting the true economic worth of the shares absent liquidity.