Frequently Asked Questions

Employee Ownership FAQs

Common questions about employee stock ownership plans (ESOPs), employee ownership trusts (EOTs), and other forms of employee ownership, from the basics to technical topics.

This FAQ is written primarily for business owners, managers, and advisors involved in setting up or running an employee ownership plan. If you're an employee at an ESOP company looking to understand your own benefits and rights, see our articles on Working at an ESOP Company and The Rights of ESOP Participants.

NCEO employee ownership FAQ hero (keyboard)

How does the ESOP repurchase obligation affect value?

There are two issues here. First there is the issue of whether the put option (the requirement that the employee can sell the stock back to the company for its fair market value) ever should affect value. The second is whether the cash flow needed to fund repurchase reduces value. Most advisors and trustees, as well as the Department of Labor, now strongly argue that the repurchase obligation can affect value, especially in mature ESOPs, and should be factored into the appraisal. The obligation represents a potentially significant financial cost to the company that should not be ignored. If it is not, the company will be paying an artificially inflated price to those who depart sooner and a lower price to those leaving later.

The repurchase obligation may not affect value in all cases, however. Some ESOP companies have substantial cash already contributed to the ESOP trust, enough to satisfy the obligation for some years into the future. Other companies may be in the early stages of an ESOP and not have a material obligation for some years.

For more details, see The ESOP Repurchase Obligation Handbook

Link to this FAQ Topic: Distributions & Repurchase