An ESOP company’s legal obligation to repurchase shares from terminated participants presents a valuation issue unique to ESOPs.
We believe that the primary link between the repurchase obligation (RO) and stock value is the relationship between RO and retirement benefits. While the RO can impact the stock value in other areas, such as liquidity and ability to reinvest in growth, these other connections are tangential in most cases.
The RO impacts value by way of its impact on retirement benefits expense. For ESOP companies, we take care to understand the true economics of the Company’s retirement benefit expense structure. Because of nuances in ESOP accounting, we may need to make adjustments to historical earnings to appropriately reflect the economic impact of retirement contributions. With an understanding of historical benefit patterns, we reflect appropriate expectations of future benefits levels into the projections based on historical patterns, management’s expectations, and the Company’s contribution and repurchase policy.
We believe that this methodology is consistent with the ESOP Association’s Valuation Advisory Committee’s recommendations on best practices.