The Importance of the Repurchase Obligation in the Life of Your ESOP

Posted by Aaron Juckett, CPA, CPC, QPA, QKA on Thu, May 16, 2019
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An Employee Stock Ownership Plan (ESOP) is a qualified retirement plan that can be used as a business transition tool and as an employee ownership vehicle.

 The ESOP repurchase obligation or liability is the company’s obligation to buy back shares from ESOP participants according to the company’s ESOP plan document and ESOP Distribution Policy. The ESOP repurchase obligation helps with planning for cash requirements and how to meet bank (or seller) requirements for leveraged ESOPs.

Watch the video below to understand the importance of working with an Administration Provider that includes a repurchase obligation strategy as part of your ESOP road map and long-range planning.

 

[VIDEO TRANSCRIPT]

If you don’t have a plan, you don’t have a direction of where you’re going. Inevitably you’re going to end up somewhere you don’t want to be.

So, when we work with ESOPs, whether it’s before they start or over the long term, the first thing we do is come up with the long-term objectives of the ESOP and of the company.

When we understand first where the direction is going long term, then we can develop a plan. And part of that is understanding the repurchase obligation based on your current path. Where is your ESOP headed?

From there, we can determine whether it’s sustainable. Is that acceptable? Or are there better planning alternatives that can change that direction?

To do that, we need to look at where your company is headed financially. We need to look at what your distribution policy is. We need to look at your valuation and where it’s headed. And we need to look at your demographics and your plan parameters.

So, if we can take all of those factors and develop a repurchase obligation forecast — a roadmap that says, based on your current path, this is where your ESOP is headed over the next 20 years — we can then evaluate and make decisions.

To learn more about what’s involved in buying back shares from ESOP participants, be sure to access our ESOP Repurchase Obligation Forecasting, Reporting & Funding Tip Sheet below. Then, contact us to answer any of your ESOP questions.

Repurchase Obligation Forecasting Reporting Funding Tip Sheet

Topics: 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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