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The ESOP Repurchase Obligation Handbook
by Tim Cleary, Patrick De Craene, Judith L. Kornfeld, Anthony I. Mathews, Nathan Nicholson, Thomas Roback, Jr., Loren Rodgers, Kevin T. Rusch, Pete Shuler, Nancy Wiefek and Kelly ("Bucky") R. Wright
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Format: PDF, 93 pages
Dimensions: 8.5 x 11 inches
Edition: 5th (November 2018)
Status: Available for electronic delivery
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The Repurchase Obligation: Paying Up
The ESOP Repurchase Obligation Study
The Repurchase Obligation in S Corporations
Funding ESOP Repurchase Obligations
Repurchase Obligation Impact on Sponsor Company Share Value
Should You Releverage Your ESOP?
Nuts and Bolts of an ESOP Releveraging Transaction
The 2017 NCEO Repurchase Obligation Survey
From Chapter 5, "Funding ESOP Repurchase Obligations"The benefit provided to participants in an ESOP is generally defined as the value of employer contributions (that are not used for payments on internal ESOP loans) plus the value of shares released from loan suspense. Increases in share value and dividends are generally not included in the calculation of the benefit level. If a company handles repurchase obligations by contributing whatever cash is needed to fund current repurchase obligations, then the benefit level would equal the repurchase obligations plus the value of shares released from loan suspense.
ESOP companies are often advised to limit the benefits they are providing through the ESOP to a "normal" level of benefits to avoid negatively affecting share value. (What constitutes "normal" is generally related to the industry and geography in which the company operates.) If repurchase obligations consistently exceed the company's desired benefit level, the company will have to meet a portion of the obligation in some way other than contributions. These might include handling part of the repurchase obligation by having the company redeem shares, or by paying dividends or S distributions to recycle some of the shares. These techniques have consequences that are discussed later in this chapter.
High benefit levels do not necessarily make an ESOP unsustainable. Managing the benefit level does not reduce the cash requirements for repurchase obligations and may in fact increase them. Far more important for sustainability is whether the company is generating enough cash to meet all of the needs of the business, including repurchase obligations, without impeding growth.