Editorial Type:
Article Category: Research Article
 | 
Online Publication Date: Jan 03, 2025

Is There a Valuation Time Bomb Embedded in Your Client’s ESOP?

CFA, ASA
Page Range: 24 – 30
DOI: 10.5791/2163-8330-43.2.24
Save
Download PDF

As an employee stock ownership plan (ESOP) becomes more seasoned and its most vested employees inch closer to retirement, the manner in which the ESOP manages its annual repurchase obligation can become increasingly risky to the company because the repurchase obligation may start to “snowball.” A company with a sizeable ESOP ownership percentage that redeems the shares it purchases may find the repurchase obligation increasingly onerous as the cash outlay required to fund the repurchases grows at an exponential rate. In this article I examine a hypothetical example of a steady-state, 100% ESOP-owned company, and the impact that electing to redeem the repurchased participant shares can have on risk and value as the plan matures as compared to the identical company that elected to recycle shares.

  • Download PDF
Copyright: © 2024, American Society of Appraisers
Figure 1
Figure 1

Repurchase Percentage of Outstanding

Figure 2
Figure 2

Annual Repurchase Outlay

Figure 3
Figure 3

Ending Cash Balance

Figure 4
Figure 4

Equity Values

Figure 5
Figure 5

Share Price at 5% DLOM

Contributor Notes

1David J. Neuzil, CFA, ASA is a Director at The Griffing Group. Mr. Neuzil provides valuation and damages analyses for purposes of commercial litigation, ERISA litigation, estate and gift taxation, employee stock ownership plan compliance, and marital dissolution. Mr. Neuzil has provided litigation support in a number of high-profile matters in the Delaware Court of Chancery. Mr. Neuzil’s experience covers a wide range of industries, including software, technology, financial services, energy, heavy manufacturing, communications, retail, distribution, real estate, food services, and others.