I. SAMPLE CHAPTERS:
A. The Theory And The Concepts
4. The Unique Challenge for ESOP Companies—The Repurchase Obligation
5. The Need for a Long Range Strategic Financial Plan
6. Special Challenges for S Corporation ESOP Companies
7. A Key Issue for Success—Capital
8. A Different Look at the Balance Sheet
11. Myth Buster Number One—Pure Recycling
12. Myth Buster Number Two—Pure Redemptions
B. The Implementation Process
14. The Long Range Strategic Financial Plan Itself
15. The Projections
16. Repurchase Obligation Study
17. Most Important Chapter—The Interrelationship of the Two Key Models
C. Best Practices
20. Sound Corporate Governance
21. Stock Incentive Programs
29. Summary of Reasons Why the Repurchase Obligation Should Not Be a Problem
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II. EXCERPTS FROM INTRODUCTORY COMMENTS:
This book is about success! I have observed several companies that I believe are not achieving their full potential, a situation that has at least been partially caused by the absence of a sound strategic business plan and a related Long Range Strategic Financial Plan.
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I have seen some very good ESOP companies sell out for the stated reason that they could not deal with, or were uncertain about, or were just afraid of the ESOP repurchase obligation. It is my opinion that the repurchase obligation is not a reason to sell the company, if the appropriate strategic financial planning is executed before there is a crisis. In the absence of the appropriate Long Range Strategic Financial Planning, yes, this ESOP repurchase obligation can be a significant challenge. Further, if the proper planning is not performed, this oversight can significantly handicap a company from reaching its potential, and yes, possibly even force the sale of the company.
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III. EXCERPTS FROM CHAPTER 17 – The Interrelationship of the Two Key Models:
The previous two chapters have dealt with two separate models:
1. The projections
2. The repurchase obligation study.
The most important step in achieving accuracy and meaning from both of the above models, and therefore the most accurate and meaningful Long Range Strategic Financial Plan, is the interrelationship of these two key models.
In preparing the above two models, significant input is employed. For much of the input, and especially for several of the most critical pieces of data, each model needs to rely upon the other. For example, to arrive at the dollar value of the repurchase obligation by year, from the repurchase obligation study, a projected stock value needs to be inputted into this study. This number is obtained from the projection model. To arrive at the projected stock value per year from the projection model, the dollar value of the repurchase obligation needs to be entered into the projection model by year. The two models need to be interrelated year by year for either one to have much meaning. There are numerous other examples.
Therefore, the answer is that these two models need to be executed hand-in-hand on a year-by-year basis. A company can start with either one.
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This back-and-forth approach, on a year-by-year basis, is the methodology that I am strongly recommending to provide the most accurate and meaningful results for both models. I have labeled this methodology “Interactive Modeling.”
The above approach is akin to two personal computers (PCs) working side by side. One PC is working the projections and the other is working the repurchase obligation study. It really is all iterative.
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IV. EXCERPTS FROM CHAPTER 21 – Stock Incentive Programs:
The establishments of one or more stock incentive programs in a well-run ESOP company is only natural and logical. Specifically, unlike almost all other private companies, an ESOP company is basically required to get an appraisal of its stock value each year. With that annual appraisal in hand, the company has a target baseline stock value available on a periodic basis, so as to set up a stock option program, SARs, or other stock-based incentive programs, just like a public company does.
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What better way to motivate and reward an ESOP company’s top executives and align their values with those of the employees than to tie a significant portion of their total compensation to an increase in the value of the stock?
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V. EXCERPTS FROM CHAPTER 29 – Summary of Reasons Why the Repurchase Obligation Should Not Be a Problem:
Now, let us recap this summary. If for example, a 100% ESOP-owned S corporation develops a sound Long Range Strategic Financial Plan, I do not believe that the repurchase obligation is that major of a problem, for the following reasons:
1. The contribution to the ESOP is a non-cash expense, unlike the cash contribution to a 401K or a profit-sharing plan. It is the redemption of the stock (the repurchase obligation) that represents the expenditure of cash. And, this cash payment for the repurchase obligation is generally many years after the expense has been recorded.
2. The payment for the repurchase obligation can be stretched out over time.
3. With proper study and planning, the required cash payments should not come as a surprise.
4. The amounts payable for the repurchase obligation are generally self-correcting. If the company happens to hit hard times, the value of the company is generally reduced, which reduces the required cash payment.
5. A 100% ESOP-owned S corporation generally pays little or no tax—this is a huge cash savings.
6. Most distributions are generally not required to start until after the loan to purchase the stock has been paid off.
As a summary comment, I do not believe that the repurchase obligation is any more of a challenge than almost any other challenge a business faces every day. An ESOP company needs to develop a Long Range Strategic Financial Plan so that it can deal with this matter as it would any other business matter. It needs a plan for success!
