The employee stock ownership plan (“ESOP”) community has weathered economic uncertainty in times past; however, the recency of COVID-19 has presented new challenges, and in some cases opportunities, that must be contemplated.
On or around February 20, 2020, the longest bull market in history met its demise as stock price valuations began tumbling. Shortly after on March 11, 2020, a global pandemic was declared by the World Health Organization. COVID-19 restrictions on a state-by-state basis have abruptly shuttered businesses deemed “non-essential” and allowed others to operate in varying capacities. ESOP-owned companies have further complications due to share repurchase obligations.
In the face of this pandemic, business leaders in the ESOP community should consider the following:
- Forecasting and maintaining a 13-week cash flow model;
- Monitoring the liquidity of key customers and suppliers;
- Confirming timing of participant repurchases for distributions, segregation, and diversification;
- Understanding options to delay repurchases;
- Considering with the ESOP trustee if a mid-year valuation is necessary; and
- Understanding company insurance coverage.
Given that valuations for ESOPs are static and premised on what is known or knowable as of a specific date, a December 31, 2019 stock price is unlikely to reflect the implications of COVID-19. Company management should work with the ESOP trustee and valuation advisor to determine whether an interim valuation is warranted. If the condition of the company has been significantly impacted by COVID-19 and the current economic weakness, an updated valuation may be particularly important. This becomes more critical for ESOP companies with significant upcoming repurchase requirements.
Leveraging an outside expert for cash flow forecasting, scenario analysis, and stock price modeling can give executives of ESOP companies objective information to make informed, confident decisions. This can give management valuable information to communicate with participants during a time when transparency between management and employees is critical.
With the effects of COVID-19 felt across all sectors of the economy, understanding key enterprise risks relating to customer and supplier performance is crucial. Companies should gather financial information from these organizations to determine their liquidity risk and identify potential threats (e.g., further disruption to the supply chain and A/R collectability).
Separately, now is an excellent time to revisit commercial insurance policies by working with internal risk managers and counsel to determine what coverage, if any, a business may have for interruption during a pandemic. We suggest coverage is assumed, notice is given to carriers, and the appropriate steps are taken to support and file a claim.
When considering the potential consequences resulting from COVID-19, we encourage company leadership to consult with their ESOP and business advisors to maintain the integrity of their organizations, including that of shareholders and employees. As with any key decisions that could affect the ESOP, it is always important to keep the ESOP trustee abreast of the key issues and decisions that could affect the ESOP and ESOP stock.
Adamy Valuation’s experts have extensive experience dealing with these matters. Should you have any questions, please contact Adamy Valuation. We welcome the opportunity to work with you and your advisors.