Case Study
ESOP Repurchase Obligation Funding

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Situation: Employee Stock Ownership Plans (“ESOPs”) allow employees to share in the value of their company. These programs can be excellent ways to attract and retain employees and maintain a firm’s independence over multiple generations. One challenge facing ESOP companies is that as employees separate from employment, the company must have cash on hand to repurchase the shares those employees have accumulated. Cornerstone has worked with ESOP companies for almost a decade and a half and has found that while each one is thoughtful in allocating shares to encourage an ownership mentality, many do not have the financial acumen to properly fund the repurchase obligations they all eventually face.
One recent example we encountered was a partial ESOP company that had about $100 million of liabilities coming due over the next two decades and only $10 million of assets set aside. The assets they had were not allocated optimally for a cyclical company where year-to-year cashflows could not be relied upon to fund their needs.
Solution: Our team began working on the funding strategy for this client by creating transparency around the existing assets earmarked for liability funding. This asset/liability work included calculating a normal cost, or annual budget, that the company would set aside to pay future liabilities. Another part of this analysis involved discussing the liquidity – or lack thereof – of the current assets in the fund.
The prior strategy involved funding long-term insurance contracts and relied on cashflow and debt to fund near term liabilities. By analyzing the company’s operating results, cash flow, and repurchase obligation study, Cornerstone developed a strategy which involved more efficiently utilizing corporate-owned life insurance. This enhancement freed up cash for investment into traditional investments to bolster the company’s ability to pay its obligation without adding to its operating debt.   
Results: Once the initial transition was completed, we established an ongoing monitoring process to measure progress against our initial assumptions. This monitoring enables us to make decisions based on actual performance and to adjust for any changes that will inevitably occur. We have utilized fiduciary best practices to formalize the governance process, created an Investment Policy Statement to establish the process for making investment decisions, and have met with the client quarterly to monitor performance.
With these improved forecasting and monitoring techniques, the client has been able to better plan for a future that includes both ESOP obligations and operating company needs. In short, a problem that has always existed but was never identified is now in the open, carefully monitored, and can be appropriately prepared for and addressed.