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What’s the durability of your ESOP? Consider These Three Indicators

May 3, 2018

As of March 2018, the National Center for Employee Ownership (NCEO) estimates that there are roughly 6,700 Employee Stock Ownership Plans (ESOPs) in the United States, with the vast majority created prior to 1997.

Just like any other business, ESOP companies must identify value creation opportunities for equity shareholders. As ESOP companies mature, it’s important to assess the durability of their ownership structure in light of their strategic planning initiatives. In order to identify some of the most common challenges faced by mature ESOPs, here are three indicators to consider:

  1. Capital Needs
    When was the last time the business’ balance sheet was analyzed given the short-term and long-term capital expenditures? Will ESOP repurchase obligations conflict with plans for growth?
  2. Management Incentives
    Since the company became employee owned, have any major personnel changes occurred within the company’s management team? Are the current leaders’ interests aligned with the ESOP and the company’s plans for growth?
  3. Evolving Industry Dynamics
    Have any major industry shifts transpired that have impacted the company’s business model and its ability to maintain or increase profitability?

These indicators are not necessarily mutually exclusive to ESOPs remaining in place as shareholders, nor does employee ownership have to be an all-or-nothing structure. There are a variety of potential strategies ESOP companies should explore to address any misalignment in seeking value creation. These strategies can include refreshing the plan structure through a recapitalization, analyzing redemption alternatives, and/or offering other forms of employee ownership. In some cases, a full exit from employee ownership in its present structure may be the best resolution for value creation for the current equity shareholders. ESOP trustees and the boards of directors of ESOP companies have a fiduciary obligation to consider both unsolicited and solicited offers to sell any or all of an ESOP’s interest. As many companies prepare for and/or complete their annual ESOP valuation, this is an opportune time to consider how well employee ownership in its current form supports the strategic initiatives of the business.

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