ESOP repurchase obligation – part of the appraiser’s due diligence

During last week’s webinar, “ESOP Valuation: Repurchase Obligations”, attorney Jared Kaplan (McDermott Will & Emery) and appraiser Robert Gross (Prairie Capital Advisors) agreed that the way a repurchase obligation (RO) is handled by the Company should be a part of the valuation process.

An ESOP RO is a bigger issue now than it was 30 years ago because there are more majority and 100% ESOPs. In addition, demographics in many companies are weighted by baby boomers, resulting in large ROs as this group approaches retirement age. Consequently, some trustees and their appraisers are reexamining traditional thinking of RO treatment in the ESOP valuation, challenging companies to focus on RO planning, requiring companies to forecast RO, and explicitly reflecting RO in the valuation.  Kaplan listed several factors that can change an ESOP RO:

  • Timing of benefit payments
  • Form of payment
  • Timing of valuations
  • “Run on the Bank”
  • Recycling
  • Early diversification
  • Reshuffling/Rebalancing
  • Dividends or distributions of S-Corp earnings
  • Annual leveraged repurchases
To hear all of Kaplan and Gross’ discussion of these ESOP valuation topics, click here.