Dealing with the Downturn: Issues and Strategies for ESOP Companies
An NCEO Issue Brief
by Corey Rosen, John Miscione, Bill Vogelgesang, Elisabeth Schutz, Bob Gross, and Loren Rodgers
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Format: PDF, 46 pages
Dimensions: 8.5 x 11 inches
Edition: 1st (October 2008)
Status: Available for electronic delivery
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The Current Credit Crisis and Its Implications for ESOP Companies
Three Rules of Business Finance
The Economy, The Credit Crunch, and ESOPs
ESOP Valuations and the Effect of the Credit Crisis
Floating Rate Notes: Still a Good Investment?
Communicating with Employee Owners in Tough Times
The Impact of the Credit Crisis on ESOP Companies
From "The Current Credit Crisis and Its Implications for ESOP Companies"Recently created minority ESOP companies and particularly new 100% ESOP-owned S corporations need to be very cautious in this environment because they are most likely to be the most leveraged and may have the least financial flexibility. Such companies should assess their near-term cash flows and fixed obligations, taking into consideration the impact of the possible worsening of economic conditions. Such companies should make sure they have sufficient cash to meet their obligations and comply with their financial covenants. Management teams should reexamine all types of discretionary spending. In addition, management teams should be in touch with their current bank or bank group. Companies should make sure that their current group of institutions can support them, and companies should inquire how such institutions are managing during the current credit crisis. Companies should be proactive in examining their options. Time is not a friend, given the credit market upheaval and economic uncertainty.
While new ESOPs may face difficulty, this market will provide many options to mature 100% ESOP-owned S corporations that have paid down debt and built up cash reserves. After management teams have assured themselves that they have the liquidity to meet their obligations, they, much like Warren Buffet, will have the opportunity to consider acquisitions and investments on favorable terms. These companies may also be able to provide financial assistance to ESOP companies facing financial challenges. Ultimately, prudent acquisitions at favorable prices can result in substantial value creation for these mature ESOP companies and their shareholders.