Conserving Corporate Cash Utilizing ESOPs

Conserving Corporate Cash Utilizing ESOPs

For corporations that desire to conserve cash, a number of ESOP strategies may be of interest. A new ESOP can be put into place to accomplish the first four.

Treasury Stock Contribution

Make a tax deductible contribution to an Employee Stock Ownership Plan (ESOP) for the fair market value of the stock contribution. This reduces corporate income tax. If the contribution generates a loss, the company can recapture taxes paid in the prior two years.

Make 401(k) Company Stock Match

Replace matching 401(k) contributions with treasury stock contributed to the ESOP.

Seller Financing – “Becoming the Bank”

Shareholders can sell stock to an ESOP and take back a note. Assuming the selling shareholders are willing to make an uncollateralized loan, they can “become the bank” and take back a note at an above market rate of interest. In most cases, the corporation can provide warrants, an “equity kicker,” with the loan to increase return. Because the selling shareholder is taking the risk of an unsecured creditor, he/she is entitled to a higher return, as determined by the market returns achieved by private equity groups.

Convert Existing Plan Assets

Converting the assets of a Profit Sharing Plan (PSP) or 401(k) to an ESOP for the purchase of treasury stock creates an infusion of cash for the company. Employees can be given a one-time option to move funds from a PSP or the discretionary employer contributions made to a 401(k) plan into an ESOP to purchase company stock. While there is significant risk in this strategy and full disclosure is required, it has been used with success.

For Existing ESOPs

Revisit the ESOP Distribution Policy

This policy drives the outlay of cash to departed plan participants in ESOP companies. During times of economic distress, the company may find it necessary to defer the starting dates for payments and/or to “stretch out” installment payments over the maximum period allowed.

Refinance Existing ESOP Loans

Companies can attempt to negotiate better terms on existing ESOP loans in the form of extended payments and/or a reduced interest rate, whether with a bank, private equity group, or from a selling shareholder.

Existing Cash in the ESOP

ESOP companies that have accumulated liquid investments that reside in the “other investments account” of the ESOP can sell treasury stock to the ESOP. There are a number of fiduciary issues that the trustee must consider before making this decision.