Using the Three R's to Optimize Your ESOP

By Ashleigh Newlin

White Paper Overview:

For a moment, imagine this: your company is contemplating a major capital expenditure which will have material impact on cash flow, debt capacity, growth, and even enterprise value. How much time and how much money would your leadership team spend analyzing alternative scenarios, funding strategies, and impact to share price? You would likely not act on your decision without adequate due diligence and perhaps counsel from your financial advisors. Now consider this: ESOP-owned companies spend millions each year to fund the repurchase of their employee-owned shares yet invest little time in analyzing the dynamic and often dramatic impact of alternative strategies. Understanding how to apply the fundamentals of recycling, redeeming, and releveraging shares is a must for the leadership of any ESOP-owned company.

“Should we recycle, redeem, or releverage shares that need to be repurchased?”

The bottom line is that there is no quick answer—no one-size-fits-all-solution. There are pros and cons associated with each method depending on the goals for the ESOP, and relative outcomes differ based on the circumstances. Nevertheless, this article defines the “Three R’s” of repurchasing ESOP shares and explains how each strategy impacts employee benefits, shareholder returns, and the company’s repurchase obligations.

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