Gain Confidence With an ESOP Repurchase Obligation Study
The ESOP repurchase obligation is a future claim on company cash that is an unconditional liability of the Company to pay when it comes due. As such, it is critical ESOP companies get an accurate picture of the future liability and timing of the liability, so they can understand the impact on cash flows of the ESOP repurchase obligation and other strategic initiatives, and develop the right strategies to meet the obligation. With proper planning and preparation, the Company is empowered to move forward with confidence that the ESOP is sustainable.
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. Boulay’s ESOP advisors help you get there with our ESOP repurchase liability and ESOP sustainability studies.
As an ESOP company matures and becomes more successful, the ESOP repurchase obligation increases—making thorough planning and accurate forecasting even more essential. Compared to many other company expenses, the ESOP repurchase obligation is not as predictable or easy to estimate. This is because the date an employee will leave the company or exercise their diversification rights is typically not known until it happens; nor is the number of shares the employee will have in their account, and the value of those shares at the time of distribution. In addition, the Plan distribution policy will impact the timing of the cash flow needed.
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
Generally, an ESOP repurchase liability study should be performed every three to five years. However, as an ESOP matures, a repurchase obligation study may be necessary more often. A study may also be needed if there is a significant change in your projected terminations, retirements or the operations of the business, or if previous study assumptions are no longer accurate.
The best practice is to perform the study alongside your annual ESOP valuation, as the valuation should take the ESOP repurchase obligation into account.
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.
WHAT IS THE ESOP REPURCHASE OBLIGATION?
A core benefit of an Employee Stock Ownership Plan (ESOP) is that employees are given ownership stake in the company through share distributions in a retirement account. As the company becomes more profitable, and an employee’s tenure with the company grows, the value of their shares (and the associated retirement asset) 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.
If a company is publicly traded, employees can trade their stock in the public securities market. However, for privately held ESOPs, a market for participant shares may not be so readily available. To ensure employees aren’t stuck with their stock or forced to sell it at a loss, the company is required to provide a market for their shares by repurchasing them fair market value, should the employee request. This is known as the ESOP repurchase obligation.
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To learn how we can help you prepare for and fulfill your ESOP repurchase obligation, connect with Boulay’s ESOP team, or contact us by phone at 952.893.9320.