Paige Ryan. Tim Garbinsky

Transcription

1 Paige Ryan Tim Garbinsky 1 Why do we care if our ESOP is sustainable? Your definition of sustainability What makes an ESOP maintainable? Planning, monitoring and modifying Leadership commitment An ownership culture 2 1

2 Sustainability positions for choices Unsustainable limits options Sustainability is more often than not a choice 3 Ask the question and plan accordingly! 2

3 Meeting the needs of the present without compromising the ability of future generations to meet their own needs Triple bottom line economic, social, and environmental spheres Corporate Sustainability Maintaining the corporation for the long term benefit of all stakeholders ESOP Sustainability Maintaining an ESOP as a long term employee benefit plan and ownership model. What s your definition? 1 United Nations General Assembly (1987): Report of the World Commission on Environment and Development: Our Common Future 2Deloitte. Sustainability in business today: A cross industry view. Ask the question and plan accordingly! 3

4 Company receives an offer and is acquired Performing financially but impacted by repurchase obligation Dissatisfied with the ESOP for other reasons Financial difficulty New leadership not interested in perpetuating the ESOP Company never intended for plan to be permanent Other? NCEO Research available on this topic. 7 Strong business fundamentals Careful capital allocation Timing of wealth transfer for ALL Shareholders Succession planning for leadership Focus on Compliance. Keep the DOL Happy! Educate board, leadership, employees bring in experts. Short and long term focus at all stages of ESOP life cycle Have a plan for responding to offers Develop ESOP Champions and a commitment to ownership culture from leadership 4

5 CASH FLOW IS KING Corporate, shareholder, and employee benefit objectives How much ownership to ESOP? Transaction structure Rewarding board, leadership, and talent Employee communication Marketing ownership This is an iterative process! 9 CASH FLOW IS STILL KING Distribution policy and repurchase obligation Corporate vs ESOP stock repurchase Rewarding board, leadership and talent, equitybased incentives Second transaction, increase ESOP Shrinking ESOP Adjusting ESOP benefit levels Is the ESOP facilitating objectives? 10 5

6 Where s your cash going? Acquisitions Repurchase obligation funding One time distributions Redeem warrants, issuing stock Communication/culture Community involvement The haves and have nots Responding to purchase offers Plan a sale of company (assets vs. stock) Terminating the ESOP 11 Is the ESOP facilitating objectives? 12 6

7 13 Follow the plan 7

8 Discuss ESOP in the board room Incorporate ESOP into strategic and financial planning Reassess periodically and adjust cash flows, repurchase obligation, distribution policy, plan provisions. PLAN DESIGN CAN CHANGE! 15 Review and tighten the screws periodically! 16 8

9 Seek help when you are not sure which way to go. Identify short and long term corporate, shareholder, employee benefit goals people, profits and planet Understand the implications of plan design on repurchase obligations Loan Amortization Schedule (if leveraged) Eligibility Requirements Vesting Schedule Allocation Formula Distribution Policy 18 9

10 Recycling vs. redemption s impact on sustainability Understand allocations on contributions vs. dividend/s distributions Understand how use of cash impacts value Develop a plan for the have s and have not's Redeeming shares with a new inner loan Offer early diversification Adopt a creative allocation formula Award equity outside the ESOP Sell the Company? 19 Knowing what you know now, would you still design your plan the same way or would you have changed it? If changed, how? 20 10

11 Communication is Key! 21 Why you have an ESOP How an ESOP Works Frequent Questions of Misconceptions Company Health and Financial Information 22 11

12 Tell vs. Teach vs. Involve ESOP Communication Committee and Mentoring Newsletter, Intranet, and Social Media Awards and Events Don t forget External Communication 23 12

13 Culture and the Ideas they generate matter! Employee ideas can become a significant advantage over competitors Employee involvement matters! Use Open Book Management Encourage Suggestions and Participation 25 Culture and core values Leadership succession planning Talent acquisition and development Selection of board members Educate board, leadership, employees on ESOP Bring in experts as needed 26 13

14 Operating needs Capital expenditures & working capital Debt service Repurchase obligation Liquidity needs of non ESOP shareholders Limitations on access to capital of ESOP ownership Access to non bank capital may be very difficult for an ESOP owned company especially when needed Tendency of ESOP companies to self fund resulting in large cash balances 28 14

15 Reflects strategic plans Can be impacted by succession planning Got lots of cash? Repurchase liability claims capital Stock redemptions can enhance stock price growth but may mask an erosion of enterprise value Impact to value redeem/recycle can only viewed in light of opportunity costs Impact of redeeming vs recycling is complicated 29 Organic Acquisitions Pros and cons Funding Impact to value: short term vs long term Balancing competing demands for capital 30 15

16 Leveraged ESOP Contributory ESOP Cash and/or stock contributions Redeem / Recycle Not mutually exclusive Dividends/distributions Forfeitures Re leveraging 31 Funding for ESOP debt service Funding the repurchase obligation Other outside shareholder returns/dividends Normal operations Expansion Retaining key management Effect of spending on value But then again we have tax savings! 32 16

17 Balancing the cash needs of the plan sponsor and a mature ESOP requires careful analysis and will depend on the life cycle of the ESOP. Strategic oversight of these cash requirements is essential for sustainability and success of the Company and ESOP. 33 Year 10! Diversification Potential second/third tranche transactions to continue succession plan Distributions begin to grow as the ESOP ages 34 17

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19 Benefit Corporations (Legal Structure) Certified B Corporations (Certification) Legal status administered by state 19 States passed law, 11 working on it B certification not required Generally required to have a general public benefit purpose are bcorps/legislation Certified by the nonprofit B Lab to meet rigorous standards of social and environmental performance, accountability, and transparency B Corp certification is to sustainable business what Fair Trade certification is to coffee, or USDA Organic certification is to milk

20 Incorporate the ESOP into Strategic Plan Develop Board (Or Advisory Board) who support your ESOP sustainability goals (SAIC) Marketing your ESOP Monitor and Update Financial Plan Plan for Transition of Leadership Focus on Ownership Culture Lobbying for ESOPs! Oversight of plan providers. Who s responsible? Life Cycle of ESOP, and cash flow (Repurchase obligation), benefit levels Annual reengagement of valuation and trustee DOL focus projections, valuation Periodic Plan Updates What are your questions? 20

21 Adopt ESOP and other qualified plans Retain and oversee ESOP advisors and fiduciaries Review valuation Determine contributions to ESOP Assess and plan for repurchase obligation Prepare response to unsolicited offer Declare C corporate dividends or S corporate distributions Understand effects of ERISA on corporate governance D&O and fiduciary liability insurance Corporate indemnification of board members Benefit Corporations Legal Status administered by state, generally required to have a general public benefit purpose Certified by the nonprofit B Lab to meet rigorous standards of social and environmental performance, accountability, and transparency 42 21

22 Developing Board Independent outside directors Nomination/selection process Recruiting, compensating and insuring outside directors Difficulties for small companies Know what sustainability means for you. Develop a plan to meet sustainability objectives To create liquidity for current shareholders, transferring ownership and leadership to employee owned company To perpetuate an existing ESOP To develop an ownership culture To address the have s and have not's To.? Identify and address key considerations Continually reassess and expand your tool box to address your sustainability goals. 22

23 Questions? Questions? Questions? 45 Questions? Timothy Garbinsky is the outreach coordinator at the National Center for Employee Ownership (NCEO), a nonprofit membership and research organization dedicated to providing the most objective and reliable information possible on employee ownership. As outreach coordinator, Tim is responsible for managing the marketing and outreach efforts of the NCEO, from the recruitment of volunteers to working with allied organizations, to creative project design and press communication. Paige A. Ryan Originally from Maryland, Tim has worked as a marketer and educator on three continents over the past six years. He earnedhis B.A. from Duke Universityin Timothy Garbinsky National Center for Employee Ownership 1629 Telegraph Avenue, Suite 200 Oakland, CA tgarbinsky@nceo.org As a Senior Consultant for ESOP Services, Inc., Paige is responsible for all aspects of the firm's consulting services. She works directly with management, stockholders, board members, and their advisors to structure and successfully implement Employee Stock Ownership Plans (ESOPs). This is accomplished through gaining an understanding of corporate and shareholder objectives, and analyzing the ESOP s impact on the company, shareholders, and employees. ESOP Services, Inc. s unique approach emphasizes the financial aspects of ESOPs, including cash flow, tax savings, shareholder liquidity, and employee benefit levels, while coordinating the many diverse advisors and details necessary to successfully complete an ESOP transaction. Paige Ryan ESOP Services, Inc. PO Box San Diego, CA paige@esopservices.com 46 23