In an employee owned company, the value of the shares a worker owns (as in an ESOP) or the account balance in a workers internal capital account must eventually be paid out to the worker. This creates a future obligation that will impact a company’s cash flow and requires careful planning. Imagine a scenario where after 20 years a member has an account balance of $500,000 to be paid out over 20 years. Each year, the firm must pay out $25,000 in cash to that member. We stress time and time again that the value in a members internal capital account isn’t cash, that the funds can be used to fund the growth of the co-op, but at some point, the value in that account has to be turned into cash – it’s imperative that you’re ready for such an event.
ICA can assist you in this effort by performing a repurchase liability study. If your co-op has recorded a lot of value in your members capital accounts, you may want to consider performing such a study. In the coming months, ICA will be adding a repurchase liability calculator to its array of tools, check back soon.