Companies everywhere have been challenged by recent events. This book is a guide to dealing with an economic crisis, now and in the future, as an ESOP company. It starts with sections on things you can do to help secure your financial future, modify your plan to make it more suitable to the current environment, rethink compensation systems, and create board-level strategies for a changed economy. The most important part of this book, however, is about culture and communication. Drawing on the lessons of ESOP companies, we look at great ideas to ensure worker financial and physical well-being, share information, generate ideas, and give back to the community. The book has detailed examples of what companies are doing, and specific ideas and tips from experts in all areas of ESOP plan design and operation about what you can--and what you should--do to get through these difficult times.
Table of Contents
1. Financing Your ESOP and Your Company in an Economic Crisis
2. Rethinking Executive Compensation in an Economic Crisis
3. Interim Valuations
4. Distribution, Diversification, Rebalancing, and Account Segregation Issues
5. Responding to and Making Acquisitions
6. Captive Insurance
7. Worker Safety
8. Working Effectively Remotely
9. Strategic and Contingency Planning
10. Providing Employees with Financial Wellness Advice
11. Communicating in Difficult Times
12. Getting Employees Involved
13. Helping the Community
Appendix 1: Great Game of Business Black Swan Strategy
Appendix 2: Sample Employee Covid-19 Survey on Issues at Work
Appendix 3: Harry the Horse Game
From Chapter 1, "Financing Your ESOP and Your Company in an Economic Crisis"
Many banks are overwhelmed with loan requests and questions, so be patient. Banks have been allowed by new regulations to have lower capital reserves for loans made to companies that had been keeping up with debt payments before the crisis. Banks may also be willing to renegotiate covenants. Some banks may also consider a principal waiver. See your bank as a partner and show bankers how they can be repaid.
Asset-based lending and mezzanine debt are also options, especially if you have worked with them before. The cost of this debt, of course, is higher (12% to 20%). Non-bank lenders, however, may not be looking to make loans at this time. Private equity may be an option, but it is the most expensive source of capital. They might make a high-interest loan or make an equity investment, but if they do the latter they will want a significant part of your company and some level of control. If you are a 100% ESOP, there are ways to accommodate these investors, such as warrants or drop-down LLCs that can retain your 100% status. Warrants would give the investor the right to the increase in the value of a stated number of shares over some period of time. Drop-down LLCs involve a company transferring some portion of its business assets and liabilities to a newly formed subsidiary LLC, which is usually treated as a disregarded entity. Investors take some portion of the ownership of this new entity, providing a cash infusion to the ESOP company parent. Needless to say, this is a complex transaction and, in the current environment, may be possible only for a small number of companies.
Some other less conventional sources may be worth considering, such as cash-rich suppliers who may be willing to negotiate a forward supply contract (a loan made to you now for an agreement to buy their product for some time into the future at an agreed price). These work for some companies, but pose significant risks as well. If you have had joint venture offers in the past, or have opportunities for them now, they may be worth considering. If you have assets that have a long useful life, you may be able to use these for collateral. It may also be necessary to offer receivables as collateral.
Finally, you might see if former or current non-ESOP owners are willing to provide financing. One company we know asked its CEO and former owner to provide a loan at a rate somewhat below mezzanine debt rates. He agreed, and the company was able to repay him ahead of schedule.
From Chapter 3, "Interim Valuations"
If your plan provides that you will be paying people out in 2020 based on the most recent year-end valuation, that price may be difficult to afford. The argument can be made, however, that you have to do an updated valuation that incorporates some of the impact of the COVID-19 outbreak in order to protect the value of company stock assets for existing participants. The size of your obligation due in 2020 may influence whether you can or should use the 2019 year-end value. If you do not have large payouts due relative to cash available to pay them, most advisors argue you should just use the prior valuation and not set a precedent you may regret. There is also a question of what date in 2020 to use for the interim valuation, given the rapidly changing situation. On the other hand, if you pay current distributions out at a lower price, the recipients might argue that you are taking away a benefit they are already entitled to. This is the issue that will need management by communications and proper handling of the legal and appraisal details.
From Chapter 11, "Communicating in Difficult Times"
If you are a “sort of” open-book company, you’ve probably had periodic meetings to discuss the income statement and balance sheet, and maybe some general business issues, but you’re not sure employees really understand them very well. You have not been doing much to localize the numbers or to teach employees both what they mean and what they can do about them. You have some degree of employee involvement, but it is limited or ineffective.
If you don’t have a communications committee, now is a good time to set one up and charge them with the task of coming up with varied updates on the ESOP and the company. The committee should include people from different areas of the company and get enough training to understand how the ESOP and the company work.