Gain Confidence With an ESOP Repurchase Obligation Study
The ESOP repurchase obligation is a future, unconditional liability that impacts the company’s cash flow. ESOP companies must accurately assess its timing and impact to develop strategies to meet the repurchase obligation and ensure the ESOP’s sustainability. Proper planning allows the company to move forward with confidence.
You aim to secure the long-term success and sustainability of your ESOP by ensuring your ESOP repurchase obligation is properly quantified and that there is a funding plan in place. While Boulay’s ESOP advisors offer repurchase liability and sustainability study services nationwide, our Eden Prairie office is conveniently located at the corner of I-494 and Prairie Center Drive.
As an ESOP company matures and becomes more successful, the ESOP repurchase obligation increases, making accurate forecasting essential since employee departures, share value, and distribution timing are often unpredictable and influenced by the plan’s distribution policy.
ESOP repurchase liability studies provide an estimate of the ESOP repurchase obligation that, if properly stress-tested, can help the company plan and prepare for this future cash outflow.
In our ESOP repurchase liability study, we consider multiple scenarios, review the study with you and help you develop a strategy to fund the ESOP repurchase obligation. Our ESOP repurchase liability study:
- Provides timely and actionable insights
- Considers the specific circumstances and key factors of your ESOP, including company cashflows, ESOP ownership percentage and duration, stock price projections, workforce assumptions, participant demographics and distribution policy
An ESOP repurchase liability study is typically conducted every three to five years, but as the ESOP matures, more frequent studies may be necessary. This is especially important if there are significant changes in projected terminations, retirements, business operations, or if previous assumptions are no longer accurate. The best practice is to perform the study alongside the annual ESOP valuation, as the valuation should account for the repurchase obligation.
Many repurchase liability studies focus solely on the projections of cash flows that are necessary to meet the ESOP repurchase obligation, without incorporating the development of strategies to manage the ESOP and Company strategic initiatives over the long run. However, the most sustainable ESOPs have strategies in place to enable long-term success.
Boulay takes your repurchase liability study a step further by identifying strategies for sustainability management. The outcomes of our ESOP sustainability study include:
- Financial modeling of the effect of the ESOP repurchase obligation and other strategic initiatives
- Scenario planning for funding of the ESOP repurchase obligation (i.e., recycling, redemption or re-leveraging)
- Analysis of whether a targeted benefit level makes sense
- Review of the ESOP Plan Design and recommendations of plan amendments to make the ESOP sustainable over the long-run
- Education of board of directors on the ESOP funding requirements and the options to fund the ESOP repurchase obligation
- Effect of acquisitions on the sustainability of the Company
Your legacy owners have expressed their commitment to employee ownership. As you help bring financial rewards to those employees who are devoting careers to your business, our advisors are here to be your strategic business partners in helping you meet the ESOP repurchase obligation, sustain your ESOP and accomplish your company goals.
Office Hours
Monday 8 – 4:30 PM
Tuesday 8 – 4:30 PM
Wednesday 8 – 4:30 PM
Thursday 8 – 4:30 PM
Friday 8 – 4:30 PM
WHAT IS THE ESOP REPURCHASE OBLIGATION?
A core benefit of an Employee Stock Ownership Plan (ESOP) is that employees gain ownership in the company through share distributions, with the value of their shares and retirement assets growing as the company profits and their tenure increases.
When employees are ready to realize the value of the stock held on their behalf, there needs to be a marketplace for their shares, so the stock can be converted into spendable or investable cash. This may occur when an employee is ready to retire, when they voluntarily leave the company or are terminated, or when they exercise their diversification rights.
In publicly traded companies, employees can sell their stock on the public securities market, but in privately held ESOPs, the company must repurchase shares at fair market value to provide a market for employees’ stock. This is known as the ESOP repurchase obligation.
ESOP TEAM
Latest Insights
Post-Election ESOP Roundtable Discussion
With the start of the new year, what do the results of the November 2024 U.S. election mean for S Corporation ESOPs?Join Noelle Montano, Executive Director of ESCA (Employee-owned S Corporations of America), for a…
How Employee Participation and Engagement Drive ESOP Success
Employee Stock Ownership Plans (ESOPs) offer a transformative approach to business ownership by allowing the employees to have the financial benefit of ownership and aligning their efforts with the company's long-term goals. Research indicates that…
How the Repurchase Obligation Affects the Share Price of ESOPs
Employee Stock Ownership Plans (ESOPs) provide a robust framework for engaging employees and enhancing corporate financial strategies in closely held companies. Despite the motivational and economic benefits, ESOPs also require certain financial commitments, primarily the…
Selling to an ESOP: Shared Benefits for Business Owners and Employees
When planning their exit strategy, business owners must weigh numerous worthwhile alternatives. One option worth exploring is an employee stock ownership plan (ESOP). An ESOP is a qualified retirement plan that allows employees to own…
Using Account Segregation in an ESOP
This article was featured in the National Center for Employee Ownership (NCEO)’s January 2024 Newsletter. It is based on a presentation by Dan Markowitz, Boulay Partner and NCEO board member.Many ESOP companies prefer that when…
Managing ESOP Distributions
Employee Stock Ownership Plans (ESOPs) stand as an innovative approach for companies to empower their workforce by offering a pathway to retirement benefits through beneficial ownership stake. However, the mechanisms governing ESOP distributions are intricate,…
Helping You Get There
To learn how we can assist you in preparing for and fulfilling your ESOP repurchase obligation, reach out to ESOP team today. Our team offers expert guidance to ensure your ESOP remains sustainable and your repurchase obligations are met, providing you with the strategies needed for long-term success.