6A: Understanding ESOP Repurchase Obligation

Transcription

1 6A: Understanding ESOP Repurchase Planning Obligation for ESOP Repurchase Planning your Obligations party budget The Ohio The Employee ESOP Association Ownership Center California/Western December States 8, 2005 Chapter Conference October Kent, 5 Ohio 7, 2011 Paradise Point Resort, San Diego Cecilia A. Loftus ESOP Economics, Inc. (215) judy@esopeconomics.com!copyright 2005 ESOP Economics, Inc. All rights reserved. 1 What are Repurchase Obligations?!! The repurchase obligation is a legal obligation imposed on the sponsor of an ESOP to provide cash to participants who are entitled to a distribution!! It occurs as a result of distributions being made from the ESOP due to:! Exercise of diversification rights! In-service distributions! Termination of employment 1 1

2 What are Repurchase Obligations?!! If no public market exists for the stock, participants have a put right back to the company at fair market value! Distributions made in stock!! Or, the company can contribute cash to the ESOP! Distributions can be made in cash instead of stock 2 Factors Impacting Repurchase Obligation!! Value of company!! Percent of stock owned by the ESOP!! Age of workforce, number of employees and turnover rate!! Timing and method of the distributions (cash, note, stock)!! Vesting level of departing participants!! Form of distribution (recirculation vs. redemption) 3 2

3 Planning for Repurchase Obligations!! Forecasting repurchase obligations is a critical part of the process of planning for repurchase obligations.!! A repurchase obligation analysis (or Study, as it is usually called) is not just a set of numbers it is a process that is intended to provide answers and potential solutions 4 Definition of a Repurchase Obligation Study!! A repurchase obligation study is a longterm projection of ESOP distributions and the associated cash requirements that a company will face!and!! An analysis of strategies for managing and funding the resulting obligations 5 3

4 Do You Have to do a Study?!! No!No statutory or regulatory requirement!appraiser might not ask for it!! But!Plan sponsor has obligation to make sure that repurchase obligations can be met 6 When Should You Do a Study?!! Do first study early in the life of the ESOP!! Review assumptions annually!! Update as necessary! Whenever there are material changes in your business or the Company s strategic plans! Assumptions or census change significantly! ESOP is considering transaction that will affect repurchase obligations!! Otherwise, update every 2 to 3 years 7 4

5 The Forecasting Process 1.! Define issues and questions to be addressed by the study 2.! Acquire software or build model 3.! Develop assumptions 4.! Do base case projections 5.! Analyze results 6.! Identify and model potential strategies for managing and funding the RO 7.! Develop conclusions and recommendations 8.! Prepare report 8 Do it Yourself or Hire a Consultant?!! It depends!on your resources! The time to do it! The staff with adequate knowledge to do it! The software to do it!on your experience! With ESOP s! With financial projections 9 5

6 Some Tips for Getting Good Results!! Don t wait until the week before the board meeting to start the process! It takes time to do it right.!! Really focus on developing good assumptions.!! Involve the key members of management in the process!! Understand how repurchase obligations are reflected in the valuation of your stock!! Integrate the repurchase obligations into your financial model 10 The Goal of Repurchase Obligation Planning!! To develop a strategy for how the company will meet its obligations to its employee owners and, at the same time, to maximize the value of the business to its shareholders!! To do this, the implications of your repurchase method and funding need to be understood 11 6

7 Repurchase Method!! The repurchase method (i.e., redeeming vs. recirculating affects the:!number of shares owned by the ESOP!Number of shares that will have to be repurchased over time!tax treatment and cost of repurchases!size of participants accounts (and tax treatment of distributions to participants)!value per share of the company s stock 13 Redeeming vs. Recirculating!! Redeeming! Company buys back shares! No tax deduction! ESOP s ownership reduced! No addition to participant s accounts! May have anti-dilutive effect on per share value in the long-term!! Recirculating! Trustee repurchases shares, shares reallocated! Repurchase with tax deductible contributions (C corporation)! ESOP s ownership unchanged! Participant s account balances increase 14 7

8 How Can Repurchase Obligations Be Funded?!! The typical list of methods for funding repurchase obligations:! Pay-as-you-go! Cash accumulation in ESOP! Cash accumulation in corporation! Debt Internal or external! Internal market! Not really a funding method!! Sale or initial public offering! Not really a funding method! 15 How Can Repurchase Obligations Be Funded?!! Most companies find that a combination of funding methods works best!! The challenge is finding the combination that is most appropriate for your company 16 8

9 How Can Repurchase Obligations Be Funded?!! Finding the right combination requires that you address several questions:!to what extent can repurchases be handled out of current cash flow?!is some sort of advance funding (sinking funds or insurance) necessary and feasible?!will it be necessary to use debt or look to third party solutions to meet the repurchase obligations? 17 In Closing!! Don t ignore repurchase obligations!! Understand what drives repurchase obligations!! Develop a repurchase obligation strategy!! Understand how repurchase method impacts share value!! Use reasonable assumptions when forecasting repurchase obligations and model multiple scenarios!! Update your forecast and your strategy regularly 18 9

10 Questions? 19 Contact Information Cecilia A. Loftus, QPA, QKA Contact Information ESOP Economics, Inc Walnut St., Suite 1501 Philadelphia, PA, Phone (215)

11 !"#$$%$&'()*+'!#+,-'.*/&0,'!"#$%&'()*(+,%-.&'/(01&&%2(3.45%62( 120'345!'677)8%#,%)$' 9#"%:)+$%#;'<07,0+$'4,#,07'92#=,0+'9)$:0+0$80' 12&#3%-0"-4!%/)!%5-/()!06%!!'''1#H0'5I$0+72%='):',20'0$,%+0'!+)8077'!!'''J)'$00/',)',+-',)'1+#%">"#K0'$0I'&+)*$/'!!'''1#%")+'-)*+'L0#"7',)'-)*+'!#+,%8%=#$,7'!!'''1#%")+'-)*+'L0#"7',)'-)*+'F07)*+807''!!'''M#"*0'):'9)LL*$%8#,%$&'3N=08,#,%)$7'!!'''O#H0'L0#"',%L0'#'.%&'90"0>+#,%)$'!!'''9)$,%$*)*7"-'!"#$B'!"#$'#$/'!"#$'#&#%$' C' 11

12 *!!"##$%&'()*$+%&!,-.$+/-$0&'(+1#$-1(#2&3&4+5/+,,#2& "!EEEA5$--+G>#58+%GA>#5! R! 12

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

15 FG! 15

16 * "!!!H/09)/!I/(+$0J!CKIK!F76((*!;00#7)(&/0J!E$7! "!!!L/7)9)(!;K!H#*&>0J!MFN:!M7#$#1)70J!E$7! "!!!C)76(+4!OK!F&(=#+4J!?>++(.!L#15($.!,P! 16