Why ESOPs Are Built for Resiliency
Steve Suckow, Director, Corporate Advisory
|
March 30, 2020
|
Corporate Advisory,
Addressing Covid 19
- Keywords:
- covid-19
Steve Suckow, Director, Corporate Advisory
|
March 30, 2020
|
Corporate Advisory,
Addressing Covid 19
The recent, swift change to the business environment has every organization assessing its ability to weather the current storm and the potential headwinds in the future. Generally speaking, we’ve found that employee-owned companies are uniquely positioned to navigate the current environment.
Why?
Operating expenses. Since every employee is also an owner, businesses should have an advantage in making the hard choices that every business faces. This is not to minimize how hard these choices are, but we know of numerous ESOP companies that witnessed firsthand the power of a shared ownership during prior business downturns. When ownership and employment are aligned, there is a common purpose. Employees come forward with ideas on what expenses to reduce and how to make things more efficient. Stakeholders hold conversations about benefit reductions. Some companies have shared commitments to salary and wage reductions. At other companies, some employees have volunteered for furlough to allow employees with families to continue to draw a paycheck.
Employee ownership does not guarantee success, but it does guarantee that if a company is successful, every employee-owner shares in that success. And because employees are owners, the horizon is the long-term, not until the end of the downturn. The keys to realizing these strengths are leadership, communication and culture.
Fixed obligations. Besides reducing expenses, businesses also need to consider their commitments and obligations. For ESOPs, those obligations include the payments to terminated and retired employees (repurchase obligations). Repurchase obligations are based on an independent third party’s appraisal of the value of the business. Unlike debt, repurchase obligations can adjust as a business’ performance and prospects change. While the timing of these adjustments and the details of these payments may impact the near-term liquidity, the dynamic nature of this obligation compared to other third-party capital commitments is a unique feature of employee ownership and points to their resilience in a downturn. However, careful consideration and analysis need to be given to the timing, terms and participant demographics.
Liquidity. Finally, most ESOPs operate in traditionally stable industries with strong, recurring cash flows and predictable capital expenditures. While we face an unprecedented economic situation, most ESOP companies enter this period from a position of strength because of their conservative approach. Mature ESOPs typically have large balances of accumulated cash, and many also have committed lines of credit, which can provide further liquidity. The existence, safety and security of these resources is important.
The future. The unprecedented nature of the current environment has created great uncertainty. However, the unique strengths of ESOPs can provide a significant source of resilience, putting employee-owned companies in position to make their way through the current storm and emerge on the other side. Timely and thoughtful management, as well as the unique attributes of each company’s culture, are the north stars for the journey.
The unique issues that newer ESOPs are experiencing will be the subject of a future article.
Read more
Steve Suckow, Director, Corporate Advisory
The recent, swift change to the business environment has every organization assessing its ability to weather the current storm and the potential headwinds in the future. Generally speaking, we’ve found that employee-owned companies are uniquely positioned to navigate the current environment.
Why?
Operating expenses. Since every employee is also an owner, businesses should have an advantage in making the hard choices that every business faces. This is not to minimize how hard these choices are, but we know of numerous ESOP companies that witnessed firsthand the power of a shared ownership during prior business downturns. When ownership and employment are aligned, there is a common purpose. Employees come forward with ideas on what expenses to reduce and how to make things more efficient. Stakeholders hold conversations about benefit reductions. Some companies have shared commitments to salary and wage reductions. At other companies, some employees have volunteered for furlough to allow employees with families to continue to draw a paycheck.
Employee ownership does not guarantee success, but it does guarantee that if a company is successful, every employee-owner shares in that success. And because employees are owners, the horizon is the long-term, not until the end of the downturn. The keys to realizing these strengths are leadership, communication and culture.
Fixed obligations. Besides reducing expenses, businesses also need to consider their commitments and obligations. For ESOPs, those obligations include the payments to terminated and retired employees (repurchase obligations). Repurchase obligations are based on an independent third party’s appraisal of the value of the business. Unlike debt, repurchase obligations can adjust as a business’ performance and prospects change. While the timing of these adjustments and the details of these payments may impact the near-term liquidity, the dynamic nature of this obligation compared to other third-party capital commitments is a unique feature of employee ownership and points to their resilience in a downturn. However, careful consideration and analysis need to be given to the timing, terms and participant demographics.
Liquidity. Finally, most ESOPs operate in traditionally stable industries with strong, recurring cash flows and predictable capital expenditures. While we face an unprecedented economic situation, most ESOP companies enter this period from a position of strength because of their conservative approach. Mature ESOPs typically have large balances of accumulated cash, and many also have committed lines of credit, which can provide further liquidity. The existence, safety and security of these resources is important.
The future. The unprecedented nature of the current environment has created great uncertainty. However, the unique strengths of ESOPs can provide a significant source of resilience, putting employee-owned companies in position to make their way through the current storm and emerge on the other side. Timely and thoughtful management, as well as the unique attributes of each company’s culture, are the north stars for the journey.
The unique issues that newer ESOPs are experiencing will be the subject of a future article.
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