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ESOP Corner: Can you meet your repurchase obligations?

Many companies with an Employee Stock Ownership Plan (ESOP) take a “pay as you go” attitude with respect to their future repurchase obligations that result from employees terminating employment (e.g., resignation, death, retirement). After all, from an accounting point of view, these obligations are an off balance sheet liability.

Yet firms that perform annual valuations of ESOP companies, may well consider the effects of the repurchase obligations. Bankers, too, during the underwriting process, tend to be interested in the influence of such a repurchase obligation on a company’s future cash flows.

What to do?

Planning effectively for ESOP obligations can demand an in-depth study of what the future may hold, both for the company and for its ESOP plan participants. For example, the company should consider if there are a number of employees with large account balances who are expected to retire within a few years of each other. Indeed, forecasting repurchase obligations and having sufficient liquidity to meet this future liability is critical to a company’s long-term success.

In short, taking a proactive approach to quantifying your company’s repurchase obligation is your best bet.

To learn more about this topic or conducting a repurchase obligation study, please contact BerryDunn’s Bill Enck.