PROJECTING ESOP REPURCHASE OBLIGATIONS. Framework

Transcription

1 PROJECTING ESOP REPURCHASE OBLIGATIONS Methods & Factors to Consider Cecilia A. Loftus ESOP Economics, Inc. 18 th Annual Ohio Employee Ownership Conference Akron/Fairlawn, OH April 16, 2004 Framework Practical reasons for repurchase obligation studies Guidelines and options for getting the study done with good results How to analyze the results when the work is done 1

2 Why should we do a study? Prepare for the future of the ESOP Avoiding surprises Security for the Employee owners Success of the ESOP! How can we use the results? Anticipate future liquidity needs and develop a funding plan Evaluate changes in distribution policies or plan rules Quantify the additional repurchase obligations that would result from the ESOP acquiring more stock 2

3 When should we do a study? Ideally, during feasibility analysis and plan design phase Your ESOP owns more than 15% - 20% of the company s stock The ESOP has been in place > 2 to 3 years Study results should be updated regularly What information can we get from a study? How many shares you will have to repurchase How much cash will be needed to repurchase those shares Individual account balances, particularly for large accounts 3

4 How can we accomplish getting the study done? Complete the study yourself Spreadsheet or repurchase obligation software Advantages: Run more scenarios and update results more readily Have it done professionally Advantages: Consultants bring expertise to the project Developing assumptions Analyzing results and their implications for you What is involved in doing a study? DEFINE SCENARIOS GATHER DATA DEVELOP ASSUMPTIONS DO PROJECTIONS ANALYZE RESULTS BUILD A REPORT 4

5 #1: Define the scenarios to be projected What questions are you trying to answer? What variables are most important for your study? What is the likely range of values for key variables? #2: Gather the data for the study Census information Business plan and forecasts Demographic/actuarial information Plan document ESOP distribution policies Valuation report ESOP loan amortization schedules ESOP funding plans 5

6 #3: Develop the assumptions Good assumptions are essential for good results Reasonable Consistent with other corporate planning Internally consistent within each scenario #3: Develop the assumptions Data needed for completing a study falls into four categories Plan rules Demographic/Actuarial information Financial data Funding requirements 6

7 #3: Develop the assumptions Review plan documents and consult plan administrator for plan rules currently in practice Eligibility and vesting Retirement age Timing and form of distributions Diversification #3: Develop the assumptions Group employees with similar characteristics so you can fine-tune demographic and actuarial assumptions Turnover Death and disability Age and compensation of new hires Changes in size of workforce Compensation growth Exercise of diversification rights 7

8 #3: Develop the assumptions Financial information can be found in the most recent valuation from the appraiser, annual reports from the plan administrator and CFO s internal business forecasts Stock value Loan amortization schedule Contributions Dividends S corporation distributions Additional stock acquired by ESOP #3: Develop the assumptions Gather information on how repurchases are actually being handled in the ESOP Redeeming vs. recirculating stock Sources of liquidity for repurchases Pay-as-you-go Sinking fund in ESOP or company Insurance Debt Internal market Rate of return on other plan investments 8

9 #3: Develop the assumptions Things to remember Consider a wide range of values for key variables Understand the relationships among variables Get input and buy-in from ALL key players #4 Do the projections Input your data Build a spreadsheet model, or Enter the assumptions into repurchase obligation software Telescope from ESOP Economics, Inc. PERLS from Principal Financial Group Project results for years Check your results to make sure that they make sense 9

10 #5 Analyze the results Look for answers to the questions you had when you developed the scenarios The results may suggest the need to modify the assumptions The process is likely to require several iterations of the projections #5 Analyze the results Ask yourself the critical questions How large are repurchase obligations relative to cash flow, earnings and compensation What are the best methods of funding and handling repurchases? Should changes in the plan or distribution rules be considered? 10

11 #6 Build a report Try to organize the information in a concise and understandable way Executive summary Detailed projections Detailed descriptions of the assumptions Some tips for getting good results Give yourself enough time to complete the project The projections will only be as good as the assumptions you use, focus on getting them right! Involve key members of management in the process 11

12 Remember The projections are part of the planning process, not an end in themselves! Use the results to develop a strategy for managing and funding repurchase obligations The long-term success of an ESOP requires planning for repurchase obligations 12