ESOP Repurchase Obligation: Identify Long-Term ESOP Objectives

Posted by Aaron Juckett, CPA, CPC, QPA, QKA on Mon, Apr 23, 2012
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At this week’s NCEO Annual Employee Ownership Conference in Minneapolis I will be leading an expert ESOP Repurchase Obligation Roundtable discussion on ESOP Repurchase Obligation Forecasting.  We will answer questions about the forecasting process and share some best practices.  Today’s post will focus on an ESOP Repurchase Obligation best practice that will set the tone for the entire process: 

Work with the board of directors to identify your long-term ESOP objectives. 

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In order to effectively forecast your ESOP repurchase obligation and develop a strategy to achieve your long-term corporate and ESOP objectives, you have to identify the objectives.  The best way to accomplish this is to work with the board of directors to clearly identify your long-term ESOP objectives.  While every company will have a slightly different long-term ESOP objective, they are likely to fall into one of three categories. Each category has different repurchase obligation planning and fiduciary implications for both the plan sponsor and the plan trustees:

  1. Remain Employee Owned.

  2. Maximize the Value of the Company.

  3. Sell the Company.

Remain Employee Owned. If remaining employee owned in the long-term is a top priority, you will need to remain solvent and profitable and will likely need to take a more conservative approach to your repurchase obligation planning and funding. Since you need to consider all offers, you should review your articles of incorporation and corporate bylaws as well as your corporate governance practices to make sure you are able to properly evaluate offers to purchase from the perspective of remaining employee owned. If the company is not 100% employee owned, then acquiring the remaining ownership of the company may also be a top priority.

Maximize the Value of the Company. Maximizing the value of the company means that you may or may not be an ESOP company in the long-term. If maximizing the value of the company is a top priority, at some point you may need to use cash that would otherwise be reserved for repurchase obligation funding to reinvest in the company. This strategy could put you in a position where you will either need to sell the company in the future to fund the repurchase obligation or are put you into a position where an offer to purchase the company cannot be refused.

Sell the Company. This objective is generally preferred when the ESOP is seller-financed and the seller(s) would prefer to be paid more rapidly than provided by the seller note. This will generally happen by selling to a third party when the right offer is obtained or by going public. This objective may also be preferred when the ESOP was used as a transitional owner and another shareholder(s) and/or management would like to be the long-term owner(s) of the company. This will happen by corporate redemption, direct sale, or shrinking the ESOP over time. There are many ways to accomplish this objective, but, as with all fiduciary decisions, it is essential that the ESOP trustee is making decisions solely in the interest of the plan's participants and beneficiaries. Under this objective ESOP repurchase obligation planning will be more short-term focused than under the other two approaches. 

Topics: Employee Stock Ownership Plan (ESOP), ESOP Repurchase Obligation

Aaron Juckett, CPA, CPC, QPA, QKA
Written by Aaron Juckett, CPA, CPC, QPA, QKA

Aaron is President and Founder of ESOP Partners and provides implementation, administration, and consulting services to hundreds of companies. He is a member of The ESOP Association (TEA) and the National Center for Employee Ownership (NCEO).

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