| In view of the complexities of the
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| | purchasing shares from separated
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| financial accounting and federal tax
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| | participants by the company. This is,
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| rules governing ESOPs, many ESOP
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| | of course, an outlay of cash for which no
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| sponsoring companies lose sight of larger
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| | federal tax deduction is available.
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| issues and become buried in the
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| | When the trust uses deductible cash
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| technical details of their ESOP and
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| | contributions to buy back shares from
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| remain fixed on a single use for their
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| | separated participants, these repurchased
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| ESOP. Short term benefits of a
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| | shares are reallocated to the remaining
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| particular ESOP strategy should not
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| | participants and the process continues as
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| overshadow longer term objectives of the
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| | the same shares are purchased over and
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| company and alternative uses for their
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| | over again by the trust.Buy back of
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| ESOP should be addressed every couple of
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| | shares by the company, however, leads to
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| years.Typical ESOP TransactionA very
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| | a reduction or possible total elimination
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| typical scenario in the life cycle of
| |
| | of this liability. If this alternative
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| ESOPs is the case where the plan was
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| | appears to be the most feasible, other
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| originally adopted to provide a
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| | forms of incentive compensation or
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| tax-favored means of buying out the
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| | retirement oriented benefit programs
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| equity of one or more major shareholders
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| | should be considered as part of the
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| in a privately held corporation. This
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| | transition. In other words, an overall
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| objective can be accomplished using
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| | strategy should be implemented but
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| borrowed funds from a bank lender or
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| | addressed again as the ESOP mature and
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| funds provided by the corporation in the
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| | the objectives for the ESOP change.ESOP
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| form of a loan to the ESOP trust.
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| | as a Profit Sharing PlanContinued federal
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| Whatever the method, over time the
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| | tax deductible cash contributions can be
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| buyout is completed, successor management
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| | made to the ESOP and invested in other
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| is firmly in place, and the equity that
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| | securities or used to buy additional
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| was formerly owned by the selling
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| | employer company shares, either newly
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| shareholders becomes equity owned
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| | issued or from non ESOP shareholders.
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| beneficially by the plan's employee
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| | Launching into a new round of borrowing
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| participants.The Repurchase LiabilityUp
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| | is not necessary if there is adequate
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| to this point, the corporation has
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| | cash in the plan. Cash funding the ESOP
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| enjoyed the advantage of deducting the
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| | will also mitigate the impact of the
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| yearly contributions made to the plan to
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| | repurchase liability.Increasing Cash
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| service the loan to accomplish a well
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| | FlowThe company can merely contribute
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| defined purpose. For the publicly traded
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| | newly issued shares for which a federal
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| company, there is little downside in
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| | tax deduction is available. Remaining
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| such a case since the shares that are
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| | plan participants receive additional
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| distributed to retiring and terminating
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| | shares in their accounts from the
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| employees can be sold on the open market.
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| | forfeiture of unvested shares of
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| The corporation, in this case, is
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| | separated employees. If the share
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| burdened only with the administrative
| |
| | values increase over time, this is
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| costs of operation of the plan. For the
| |
| | another means of realizing appreciation
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| privately held corporation, however, the
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| | in the individual ESOP accounts; however,
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| benefits of the original objective could
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| | increasing share values mean increasing
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| all be lost if another strategy is not
| |
| | repurchase liabilities.Importance of a
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| implemented.Federal tax rules require
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| | StrategyUnless the ESOP is used by
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| that employee participants must be
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| | successor management to achieve new
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| granted a "put option" wherein the
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| | objectives such as funding acquisitions
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| company or ESOP is obligated to buy back
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| | with tax deductible dollars or other
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| the shares from separated participants
| |
| | strategies that offset the negative
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| at the then current fair market value.
| |
| | aspects of the drain on corporate cash
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| Without this provision, the prospect of
| |
| | flow to fund ever growing repurchase
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| owning shares in a private corporation
| |
| | liability, the long term advantages of
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| with little or no market would be of
| |
| | winding down the ESOP's share holdings
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| nominal interest to most employees under
| |
| | should trump the short term advantage of
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| most circumstances. This obligation to
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| | the deductibility of yearly cash
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| fund the conversion of ESOP shares into
| |
| | contributions to fund repurchases.
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| cash is referred to as the "repurchase
| |
| | Recognition of the need to formulate
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| liability." Once this liability is
| |
| | changing strategies for changing
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| recognized, the company needs to decide
| |
| | circumstances should be made when the
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| whether or not to have the ESOP or the
| |
| | plan is initially adopted and ever few
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| company repurchase the shares. There are
| |
| | years as the ESOP matures.Jeff Faust has
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| pros and cons to both and this will
| |
| | more than 15 years experience in the
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| depend on the long term strategy of the
| |
| | finance and accounting fields with over
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| company and the ESOP.Redemption or
| |
| | 10 years in the valuation and stock
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| Repurchase?Shares can be repurchased by
| |
| | option industries. He is currently
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| the ESOP using cash that was contributed
| |
| | Director of Business Valuations at
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| to the ESOP on a pre-tax, making this
| |
| | Greenstein Rogoff Olsen & Co., a top Bay
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| the preferred approach. Another
| |
| | Area CPA firm.
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| alternative is to adopt a policy of
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| |
|
