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 carefully evaluate timing and impact to develop strategies that meet the repurchase obligation and secure the ESOP’s sustainability. Effective planning empowers the company to progress with confidence.
Your goal is to ensure the long-term success and sustainability of your ESOP by accurately quantifying the repurchase obligation and establishing a solid funding plan. While Boulay’s ESOP advisors offer repurchase liability and sustainability study services nationwide, our downtown Minneapolis office is conveniently located between Target Field and U.S. Bank Stadium, off South 5th Street.
As an ESOP company grows and succeeds, its repurchase obligation rises, making accurate forecasting crucial. Employee departures, share value, and distribution timing—often impacted by the plan’s distribution policy—are unpredictable factors that must be carefully considered.
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 generally conducted every three to five years. However, as the ESOP matures, more frequent studies may be needed, especially if there are significant changes in projected terminations, retirements, business operations, or if prior 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.
While many repurchase liability studies focus solely on cash flow projections, the most sustainable ESOPs include long-term strategies that support both ESOP management and company initiatives. 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 provide financial rewards to the employees who are dedicated to your business, our advisors serve as your strategic partners, helping you meet your ESOP repurchase obligation, 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. As the company prospers and the employees’ tenures lengthen, the value of their shares and retirement assets grows.
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 can happen when an employee is ready to retire, voluntarily leaves the company, is terminated, or exercises their diversification rights.
In publicly traded companies, employees can sell their stock on the public securities market. However, in privately held ESOPs, the company must repurchase shares at fair market value to create 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 strategies for long-term success.