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

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.

ESOP Repurchase Obligation Forecasting, Reporting & Funding

The ESOP repurchase obligation is the company’s obligation, as created by the ESOP put option, to buy back shares from ESOP participants according to the company’s ESOP document and ESOP Distribution Policy

ESOP Put Option

If company stock is not publicly traded a participant must be given a put option.  A put option gives the participant a right, but not the obligation, to require the company to repurchase the stock under a fair valuation formula as determined by an independent ESOP appraiser.

Employee Owned Company Sold Due to Upcoming Repurchase Obligation

The December 1, 2011 Employee Ownership Update is online and discusses the following:  

Repurchase Obligation Financial Reporting Requirements Unlikely to Change

The February 15, 2011 Employee Ownership Update is online and discusses the following:

Repurchase Obligation Factors: Assumptions and Participant Data

As we continue our discussion about the Interrelationship Between Stock Valuation and the Repurchase Obligation, let's start by talking about Garbage_In,_Garbage_Out or GIGO. The concept of GIGO certainly applies to preparing a repurchase obligation study. If you don't use accurate assumptions in your forecast, then you won't have an accurate repurchase obligation forecast. While I would initially say that any first attempt at preparing assumptions for a study is better than not making an attempt at all, it is essential to continuously revisit the assumptions to ensure that they are accurate. You will also find a lot of overlap between your repurchase obligation assumptions and the information involved in the financial planning process. Some companies incorporate the repurchase obligation forecasting process into their strategic planning.

Repurchase Obligation Factors: Plan Document and Distribution Policy

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