This document summarizes key aspects of ensuring ESOP sustainability. It discusses how ESOP assets have grown significantly since 1999 due to changes in tax law. It identifies 5 characteristics of sustainable ESOP companies, including developing a repurchase obligation funding plan. It also discusses repurchase studies, stock appraisal methods, integrating appraisal methodology with repurchase forecasts and funding decisions, and applying these concepts if a repurchase obligation is unsustainable. The overall summary is that ESOP sustainability requires sufficient financial resources and planning to meet future repurchase obligations.

1. Client Alert
SEPTEMBER 2013
STEIKER, FISCHER, EDWARDS & GREENAPPLE, P.C. | SES ADVISORS, INC.
Nuts & Bolts of ESOP Sustainability
Written by Brian D. Wurpts, Vice
President of ESOP Consulting –
SES Advisors, Inc.
According to the National Center
for Employee Ownership, there
were approximately 10,900 ESOPs
in the United States at the end of
2011. Fifteen years ago when I
started working in this field, the
number was approximately 11,000.
The number of ESOPs suggests
little or no growth in employee
ownership, but the assets held by
ESOPs tell a different story:
ESOPs
Much of the asset growth in ESOPs
can be attributed to changes in the
tax code in 1998 that made 100%
ESOP ownership in an S Corporation
feasible. With so many ESOPs today
becoming majority or full owners,
managing the finances of both the
company and the plan in a
sustainable fashion is critical.
obligation forecasting; distribution
policies; plan funding alternatives;
benefit policies; management
incentive plans; and best practices for
corporate governance. ESOP
sustainability was the topic of our
October 2012 client symposium. This
article recaps the technical portion of
that discussion.
SES Advisors applies its expertise in
plan design, finance, feasibility and
recordkeeping to help ESOP
companies develop sustainable ESOP
practices. This includes repurchase
Five Characteristics of
Sustainable ESOP
Companies
401(k) Plans
Social
Security
Trust
Plans
Assets
Plans
Assets
Assets
1999
10,700
$340
billion
201,000
$1.7
trillion
$896 billion
2009
10,000
$869
billion
435,000
$2.7
trillion
$2.5 trillion
10,900
$1.1
trillion
450,000
$3.4
trillion
$2.6 trillion
5.25%
1. Develop and periodically review a
repurchase obligation funding plan
and capital budget;
2. Have a sound understanding of
company valuation methodology particularly the linkages between
company decisions, valuation,
ESOP benefit levels and
repurchase obligation;
8.50%
2012
(estimate)
Annual
Growth Rate
9.50%
3. Develop prudent and fair benefit
plans, incorporating repurchase
obligation funding decisions and
fair compensation principles;
4. Promote and foster an employee
ownership culture; and

2. 5. Engage in practices of wellmanaged companies such as:
good governance procedures,
appropriate management
incentive/compensation policies
and succession plans.
Repurchase Studies
Sustainable ESOP practices and
policies are built on the foundation of
a good repurchase obligation study.
An ESOP sponsor should consider
this forecast to be as integral to
management of the company’s
finances as a capital expenditure
budget.
A repurchase study should provide:
• Estimates of the total repurchase
obligation and related capital needs
over the next several years;
• A sensitivity analysis for a range of
company growth and profitability
outcomes; and
• Benefit outcomes for individual or
groups of participants at various
ages/situations and demonstrations of
how funding decisions impact these
stakeholders.
Stock Appraisal Methods
and their Link to
Sustainability
Generally valuation methods that rely
heavily on cash flows are more
compatible with ESOP sustainability
because the valuation outcome
changes proportionally as
profitability changes, thereby
reducing repurchase obligations in a
downturn and better matching
available capital. Even in discounted
cash flow or earnings capitalization
valuations, the impact of the reduced
profits is not immediately
proportional because these methods
typically look back to profits over
the last few years and ahead to
profits over the next few years
based on the company’s financial
forecast.
A sustainable ESOP company
makes its best effort to deliver the
best information possible to its
independent appraiser and trustees
in order to ensure that the price
being paid to redeem or recycle its
stock is both fair and sustainable.
Combining Appraisal
Methodology,
Repurchase Forecast
and Funding Decisions
A good repurchase funding study
will combine the employee turnover
rate analysis, the concentration of
ownership and the valuation
forecast and methodology to
produce a flexible, integrated model
that demonstrates the impact of an
ESOP company’s distribution
policies, funding policies and loan
structure.
SES Advisors combines these
concepts into an ESOP Asset
Turnover Rate (EATR). EATR is a
measurement of the percentage of
the ESOP’s company stock assets
the company or the plan will have
to repurchase in a given year (or
over a longer period). EATR
typically ranges between 4 and 15
percent in any plan year. In the long
run, EATR will tend to average
between 5 and 10 percent.
EATR allows us to compare the
ESOP repurchase obligation and
benefit levels to other ESOP
companies. Combined with
valuation concepts such as multiples
of EBITDA, EATR also allows simple
evaluations of whether the tax benefits
of being an ESOP company will
largely fund the future repurchase
obligation.
Applying the Concepts
If your ESOP repurchase obligation is
unsustainable, there are several
options to consider:
• Find out if your appraiser is willing
to factor the cash flows related to the
repurchase obligation into his or her
analysis;
• If your appraiser is not willing to
factor the obligation, take pro-active
steps to achieve a reduction in
valuation by either pre-funding the
ESOP trust ahead of the obligation, or
engaging in a re-leveraging
transaction;
• Consider segregation of terminated
accounts ahead of any bubble in the
repurchase obligation;
• Understand the repurchase obligation
funding methodologies and how they
affect benefit levels and company
value differently (e.g. dividend
funding vs. contribution funding);
• If you have disparity in benefit levels
created by past plan design or funding
policies (commonly referred to as the
“have/have not problem”), consider a
re-leveraging transaction or a prefunding strategy combined with
account rebalancing;
• Set a benefit target rate based on a
reasonable compensation analysis
(e.g., a target percentage of annual
compensation that may or may not be
adjusted for annual profitability); and
Client Alert

3. • Understand the funding techniques to employ if the repurchase obligation exceeds available cash plus the target
contribution in any year.
ESOP sustainability is ultimately a matter of ensuring that your ESOP company has sufficient financial resources and
planning tools to meet its future repurchase obligations and the right corporate governance structure and culture to
ensure you get the most out of your ESOP. We strive to provide knowledge, experience and planning tools to help our
clients incorporate these concepts in their companies.
Contact Brian at bwurpts@sesadvisors.com
Complimentary Webinar: November 12, 2013
Are You Ready for Year-End? Whether your ESOP plan year-end corresponds to the calendar year or not,
you should always have a checklist ready. All are welcome to participate!
Date: Tuesday, November 12, 2013
Time: 12:30 – 1:30 p.m. ET
Presenters: Mychelle Holloway & Karen Hurley, Senior ESOP Administrators - SES Advisors, Inc.
Register Online: www.sesadvisors.com/webinar
Office Spotlight: Burlington, VT
A Commitment to Community
On a beautiful Saturday in May, SFE&G managing shareholder Tabitha Croscut & paralegal
Missy Woessner raised $1,250 in sponsorship funds for the four-mile March for Babies in
Burlington, VT. Along with Tabitha’s husband and adorable daughters, team “ESOP Divas”
walked the full four miles, and their total monies raised
were in the top 10. March on, ESOP Divas!
Con“grad”ulations!
Tabitha and Missy also participated in the
inaugural Colchester Causeway 5k Race on June
8th, which raised funds for the maintenance and
improvement of what is called a “…community
treasure and State of Vermont destination point
for locals and tourists alike.”
Contact Tabitha & Missy
at the new Vermont
office:
77 College Street
1st Floor, Suite 6
Burlington, VT 05401
Same phone number:
(802) 860-4077
Despite her busy running
schedule, Missy Woessner
found time to complete her
Bachelor of Arts in
Professional Studies from
Johnson State College – with a
4.0 GPA!
Missy has been a paralegal for
over 25 years, and an integral
part of the SFE&G team for
the past six years. Way to go,
Missy!
Client Alert

4. Save the Date: October 9, 2013
Please join us for a Client Round Table: Corporate Governance in an ESOP Company. This event is open to
all SES & SFE&G clients. CEOs, CFOs, HR, Board Members – all are welcome!
Where: Green Valley Country Club, Lafayette Hill, PA
When: Wednesday, October 9th, 8:30 a.m. – 12:00 p.m.
Register Online: www.sesadvisors.com/events
MARCH 2013
Upcoming Events
The ESOP Association’s 18th Annual
Multi-State Conference
Complimentary Live Seminar:
Client Round Table
When: September 18 – 19, 2013
Where: Scranton, PA
Presenters: Jim Steiker, Steve Greenapple,
Tabitha Croscut
When: October 9, 2013
Where: Lafayette Hill, PA
Presenters: SES / SFE&G Leadership & Other
ESOP Experts
The Business Exit Forum’s CEO
Educational Events Series
AICPA Auto Dealership Conference
When: September 25, 2013
Where: Baltimore, MD
When: October 16-18, 2013
Where: Washington, DC
Presenter: Steve Greenapple
4th Annual Southwest Ohio Employee
Ownership Forum
NCEO’s Feasibility & Best Practices for
S Corporation ESOPs Seminar
When: September 25, 2013
Where: Cincinnati, Ohio
Presenter: Jim Steiker
When: October 16-17, 2013
Where: St. Louis, MO
Presenter: Jim Steiker
Complimentary Live Seminar:
Is an ESOP Right for You?
NCEO's Strategic Planning for Your
ESOP Seminar
When: October 1, 2013
Where: Waltham, MA
Presenter: Tabitha Croscut
When: October 22-24, 2013
Where: Minneapolis, MN
Presenter: Jim Steiker
The ESOP Association’s New England
Chapter Annual Conference
The ESOP Association Technical
Conference & Trade Show
When: October 2-4, 2013
Where: Brewster, MA
Presenter: Tabitha Croscut
When: November 7-8, 2013
Where: Las Vegas, NV
Presenters: Jane Rogers, Jim Steiker, Tabitha
Croscut, Steve Greenapple, Brian Wurpts
For more information visit: www.sesadvisors.com/events
PENNSYLVANIA SES (215) 508-1600, SFE&G (215) 508-1500 | NEW JERSEY SES (973) 540-9200, SFE&G (973) 540-9292
RHODE ISLAND SFE&G (401) 632-0480 | VIRGINIA SES (757) 442-6651| FLORIDA SES (813) 818-5920 | INDIANA SES (219) 548-3696
TEXAS SES (817) 712-2363 | NEW YORK SES (585) 385-0819 | MASSACHUSETTS SFE&G (617) 310-6565
VERMONT SFE&G (802) 860-4077 | KENTUCKY SES (859) 425-1223, SFE&G (859) 244-1901
WWW. SESADVISORS.COM | WWW.SFEGLAW.COM
Client Alert