ESOP doesn’t necessarily meet with the goals of our motivations. The core reason orbits around the responsibilities of the Fiduciary. As discussed above, that person is obligated by law to accept any reasonable offer that provides value to the shareholders (the employees). For example, say we sell Headframe to our employees for $10. If the fiduciary gets an offer a year later for some reasonable multiple, say $15, the fiduciary is required to sell the company even if that means that the employees (the shareholders) all lose their jobs because the new company just wants the brand and wants to bottle it somewhere else. If the company is still settling the debt from the original ESOP buyout, the employees might not wind up with much of anything….or a job. Also, importantly to us, the company might not remain in Butte.
THE REPAYMENT OBLIGATION Third and final, the company is required to carry enough cash to reliably pay out the employees leaving or retiring in a certain
year. An entire cottage industry has been built around annual valuations of the R.O. (Repayment Obligation). So, let’s say your widget (in our case booze) is selling well, year to year. You are seeing big growth, you’ve hired more people, the value of the company has gone way up from the original valve of the ESOP sale and things are looking great right? Annually, the company is valued, most often by an outside consultant. If the value of your whiskey brand has doubled in the last year because you won some awards, then the value of the company is higher, which means the value of the shares held by ESOP members is higher, which means you are required by law to put away more money to satisfy the R.O. If you have the money the R.O. analysts says you’re going to need for the next year, you put that in the bank and it can’t be used for capital improvements, reinvestment, new markets sales and marketing, etc. If you don’t have the money, you have to go out and do a cash raise (outside investment, refinance and take on new debt, etc) to
raise enough money to satisfy the R.O. If you can’t raise the money the company may have to liquidate and the employees may be left without a company or the full value of their shares. Once we got into high level details of how ESOPs work, we became increasingly concerned that our motivation for selling wouldn’t have the outcome we hoped for. So we began to look into other models (NonProfits, Trusts, etc..) to see if we could both fulfill our desire to turn over the company and its future value to the employees and see it remain a part of Butte for the long term In the next issue, we’ll share what we’ve learned of those models and why we think they might be a better fit for owners with our same motivations.
John and Courtney McKee are the owners/ founders of Headframe Spirits and Headframe Spirits Manufacturing in Butte, MT. When they aren’t exploring succession planning years in advance they’re exploring implementing mandatory afternoon naps for all employees.
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