Gain Confidence With an ESOP Repurchase Obligation Study
The ESOP repurchase obligation is a future, unconditional liability that affects the company’s cash flow. ESOP companies must closely evaluate timing and financial impact to develop strategies to meet the repurchase obligations and uphold the ESOP’s long-term viability. With proactive planning, ESOP companies can move forward with confidence.
Your objective is to secure the long-term success and stability of your ESOP by precisely quantifying the repurchase obligation and implementing a sound funding strategy. While Boulay’s ESOP advisors offer repurchase liability and sustainability study services nationwide, our Mankato office is conveniently located on Madison Avenue.
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 offer an estimate of the repurchase obligation which, when properly stress-tested, aids the company in planning and preparing for this future cash outflow.
In our ESOP repurchase liability study, we assess multiple scenarios, review the findings with you, and assist in developing a strategy to fund the 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 becomes particularly important when there are significant changes in projected terminations, retirements, business operations, or if previous assumptions no longer hold true. The best practice is to perform the study alongside the annual ESOP valuation, as the valuation should account for the repurchase obligation.
While many repurchase liability studies focus solely on cash flow projections, the most sustainable ESOPs integrate long-term strategies to support both ESOP and company initiatives. Boulay goes further by pinpointing strategies for sustainable management in your repurchase liability study. 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 are committed to employee ownership. As you reward employees dedicated to building your business, our advisors are here as strategic partners to help you meet the ESOP repurchase obligations, sustain your ESOP, and achieve your company goals.
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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 access the value of the stock held for them, there must be a marketplace for their shares so their 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.
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Helping You Get There
To learn how we can assist you in preparing for and fulfilling your ESOP repurchase obligation, reach out to our ESOP team. Our team provides expert guidance to keep your ESOP sustainable and meet repurchase obligations, equipping you with the strategies essential for long-term success.