As employee-owned companies mature, one challenge consistently rises to the top: funding repurchase obligations. In a recent webinar hosted by Jak Kramer and Justin Gladieux, we explored how organizations can strategically plan for this long-term liability—and why Corporate-Owned Life Insurance (COLI) is gaining traction as a powerful funding tool.
Top Insights on ESOP Funding Strategies
One of the central themes discussed was the importance of understanding the repurchase obligation—a significant financial commitment that ESOPs must plan for, especially as company valuations rise and employee turnover increases. Justin Gladieux emphasized that conducting formal repurchase obligation studies and maintaining adequate liquidity are essential steps in preparing for these future liabilities.
The webinar also highlighted several common challenges ESOPs face. These include valuation errors that can lead to missteps in funding, unexpected employee turnover that disrupts actuarial assumptions, and liquidity constraints that limit a company’s ability to respond to obligations. Additionally, many ESOPs struggle with long-term strategic planning and forecasting, which can result in fiduciary and legal risks if obligations are not properly funded. Understanding these challenges is the first step toward building a more resilient funding strategy.
The webinar explored several informal and formal funding strategies that ESOPs commonly use to manage repurchase obligations. One of the most prevalent methods is pay-as-you-go, where companies use available cash flow to redeem shares as obligations arise. While this approach is straightforward, it can be risky if unexpected events—such as sudden employee turnover or mortality—create a surge in obligations that outpaces available liquidity.
Another strategy discussed was the use of sinking funds, where companies set aside assets specifically earmarked for long-term obligations. These funds are typically invested in brokerage or custodial accounts, using a mix of cash, bonds, equities, and mutual funds to align with projected growth in company stock value. This method provides a more structured approach to funding, but still requires careful planning and forecasting.
The focus of the webinar, however, was on Corporate-Owned Life Insurance (COLI) as a strategic funding tool. COLI functions similarly to a sinking fund but adds a powerful layer of protection through death benefit proceeds. By insuring key employees—typically executives or managerial staff—companies can build a cash-value asset on their balance sheet while also gaining liquidity and long-term cost recovery. The death benefit component provides additional financial support in the event of unforeseen mortality, making COLI a compelling option for ESOPs looking to strengthen their funding strategy.
Real-World Case Study
Justin shared a compelling example of a mid-sized ESOP that used COLI to fund a segment of its repurchase obligation. Over time, the company:
This approach provided long-term financial stability while preserving share value and minimizing risk.
When to Start Planning?
The consensus: the earlier, the better. While younger ESOPs may rely on term insurance, mature companies, especially post-leverage phase, should begin exploring COLI and other structured funding solutions.
Learn More
Want to dive deeper into the strategies discussed and see the full case study breakdown? Click HERE to watch the session on-demand (passcode: ESOP2025!)
If you are ready to start the conversation to explore how COLI could be a solution for your long-term ESOP RPO, click HERE to fill out the questionnaire or contact us below.