New NCEO Task Force Examines Effect of Repurchase Obligations on Value

A new NCEO task force of trustees is examining how an ESOP company’s repurchase obligation should affect its stock value. The repurchase obligation can be a significant financial cost for ESOP companies, but this liability is currently not reflected on the balance sheet or income statement. Historically, valuation firms ignored the potential impact of repurchase obligations, arguing that the company could always simply be sold and the obligation would go away. The effect of this in some companies was that they were forced to sell to meet their repurchase obligations, whereas they would not have had to if the share price had been adjusted all along for the ongoing liability. In a few extreme cases, companies that had rapid cyclical growth followed by cyclical decline have found that their repurchase obligations to employees who left at a high point forced them into bankruptcy.
There is no specific regulatory or case law guidance that clarifies whether and how the repurchase obligation should be factored into valuation. The Department of Labor's process agreements with various ESOP trustees do state that the repurchase obligation should be considered, but they provide no guidance on how to do that. Most trustees currently agree that repurchase obligations should be considered, but there is no agreement on how to do that.

The NCEO task force will produce a detailed report on this issue. We will get input from the valuation community as part of that process. NCEO members can learn more about the issue and the different approaches to factoring repurchases into company valuation here.