Alternative Alternative Approaches Approaches To Building And To Building And Managing Equity Managing Equity Capital Capital
Alternative ApproachesAlternative ApproachesTo Building And Managing To Building And Managing
Equity CapitalEquity Capital
FACE THE COLD, HARD FACE THE COLD, HARD FACTS OF EQUITY FACTS OF EQUITY MANAGEMENTMANAGEMENT
FACE THE COLD, HARD FACE THE COLD, HARD FACTS OF EQUITY FACTS OF EQUITY MANAGEMENTMANAGEMENTUnderstand why you have equity in the first place
FACE THE COLD, HARD FACE THE COLD, HARD FACTS OF EQUITY FACTS OF EQUITY MANAGEMENTMANAGEMENTUnderstand why you have equity in the first place
Is it a sustainable model in your current and future business environment?
EARNINGS GROWTH NEEDED TO EARNINGS GROWTH NEEDED TO SUSTAIN A PATRONAGE PROGRAMSUSTAIN A PATRONAGE PROGRAM
EARNINGS GROWTH NEEDED TO EARNINGS GROWTH NEEDED TO SUSTAIN A PATRONAGE PROGRAMSUSTAIN A PATRONAGE PROGRAM
Assumptions:
•Growth must be internal without adding additional equity through mergers, debt through financing, etc.
EARNINGS GROWTH NEEDED TO EARNINGS GROWTH NEEDED TO SUSTAIN A PATRONAGE PROGRAMSUSTAIN A PATRONAGE PROGRAM
Assumptions:
•Growth must be internal without adding additional equity through mergers, debt through financing, etc.
•All sales are considered to be patronage based sales
EARNINGS GROWTH NEEDED TO EARNINGS GROWTH NEEDED TO SUSTAIN A PATRONAGE PROGRAMSUSTAIN A PATRONAGE PROGRAM
Assumptions:
•Growth must be internal without adding additional equity through mergers, debt through financing, etc.
•All sales are considered to be patronage based sales
•The company is a $50 million company in year 1 and pays 30% cash patronage and 20% of earnings in retirement.
EARNINGS GROWTH NEEDED TO EARNINGS GROWTH NEEDED TO SUSTAIN A PATRONAGE PROGRAMSUSTAIN A PATRONAGE PROGRAM
Year 1
Sales 50,000,000
% Profit 4%
$ Profit 2,000,000
Cash Patronage 600,000
Cash Retirement 400,000
Future Retirement Equity 1,400,000
Assumptions:
•Growth must be internal without adding additional equity through mergers, debt through financing, etc.
•All sales are considered to be patronage based sales
•The company is a $50 million company in year 1 and pays 30% cash patronage and 20% of earnings in retirement.
EARNINGS GROWTH NEEDED TO EARNINGS GROWTH NEEDED TO SUSTAIN A PATRONAGE PROGRAMSUSTAIN A PATRONAGE PROGRAM
Year 1 Year 2
Sales 50,000,000 55,000,000
% Profit 4% 4%
$ Profit 2,000,000 2,200,000
Cash Patronage 600,000 660,000
Cash Retirement 400,000 440,000
Future Retirement Equity 1,400,000 1,540,000
Assumptions:
•Growth must be internal without adding additional equity through mergers, debt through financing, etc.
•All sales are considered to be patronage based sales
•The company is a $50 million company in year 1 and pays 30% cash patronage and 20% of earnings in retirement.
EARNINGS GROWTH NEEDED TO EARNINGS GROWTH NEEDED TO SUSTAIN A PATRONAGE PROGRAMSUSTAIN A PATRONAGE PROGRAM
Year 1 Year 2 Year 13
Sales 50,000,000 55,000,000 172,610,000
% Profit 4% 4% 4%
$ Profit 2,000,000 2,200,000 6,904,400
Cash Patronage 600,000 660,000 2,071,320
Cash Retirement 400,000 440,000 1,380,880
Future Retirement Equity
1,400,000 1,540,000 4,833,080
Assumptions:
•Growth must be internal without adding additional equity through mergers, debt through financing, etc.
•All sales are considered to be patronage based sales
•The company is a $50 million company in year 1 and pays 30% cash patronage and 20% of earnings in retirement.
EARNINGS GROWTH NEEDED TO EARNINGS GROWTH NEEDED TO SUSTAIN A PATRONAGE PROGRAMSUSTAIN A PATRONAGE PROGRAM
Year 1 Year 2 Year 13 Year 14
Sales 50,000,000 55,000,000 172,610,000 189,871,000
% Profit 4% 4% 4% 4%
$ Profit 2,000,000 2,200,000 6,904,400 7,594,840
Cash Patronage 600,000 660,000 2,071,320 2,278,452
Cash Retirement
400,000 440,000 1,380,880 1,518,968
Future Retirement Equity
1,400,000 1,540,000 4,833,080 5,316,388
Assumptions:
•Growth must be internal without adding additional equity through mergers, debt through financing, etc.
•All sales are considered to be patronage based sales
•The company is a $50 million company in year 1 and pays 30% cash patronage and 20% of earnings in retirement.
EARNINGS GROWTH NEEDED TO EARNINGS GROWTH NEEDED TO SUSTAIN A PATRONAGE PROGRAMSUSTAIN A PATRONAGE PROGRAM
Year 1 Year 2 Year 13 Year 14 Year 26
Sales 50,000,000 55,000,000 172,610,000 189,871,000 595,900,000
% Profit 4% 4% 4% 4% 4%
$ Profit 2,000,000 2,200,000 6,904,400 7,594,840 23,836,000
Cash Patronage
600,000 660,000 2,071,320 2,278,452 7,150,800
Cash Retirement
400,000 440,000 1,380,880 1,518,968 4,767,200
Future Retirement Equity
1,400,000 1,540,000 4,833,080 5,316,388 16,685,200
Assumptions:
•Growth must be internal without adding additional equity through mergers, debt through financing, etc.
•All sales are considered to be patronage based sales
•The company is a $50 million company in year 1 and pays 30% cash patronage and 20% of earnings in retirement.
EARNINGS GROWTH NEEDED TO EARNINGS GROWTH NEEDED TO SUSTAIN A PATRONAGE PROGRAMSUSTAIN A PATRONAGE PROGRAM
Year 1 Year 2 Year 13 Year 14 Year 26 Year 27
Sales 50,000,000 55,000,000 172,610,000 189,871,000 595,900,000 655,600,000
% Profit 4% 4% 4% 4% 4% 4%
$ Profit 2,000,000 2,200,000 6,904,400 7,594,840 23,836,000 26,224,000
Cash Patronage
600,000 660,000 2,071,320 2,278,452 7,150,800 7,867,200
Cash Retirement
400,000 440,000 1,380,880 1,518,968 4,767,200 5,244,800
Future Retirement Equity
1,400,000 1,540,000 4,833,080 5,316,388 16,685,200 18,356,800
Assumptions:
•Growth must be internal without adding additional equity through mergers, debt through financing, etc.
•All sales are considered to be patronage based sales
•The company is a $50 million company in year 1 and pays 30% cash patronage and 20% of earnings in retirement.
FACE THE COLD, HARD FACE THE COLD, HARD FACTS OF EQUITY FACTS OF EQUITY MANAGEMENTMANAGEMENTUnderstand why you have equity in the first place
Is it a sustainable model in your current and future business environment?
If it is not a sustainable model in your situation, what can be done about it?
IDENTIFY YOURIDENTIFY YOURGOALS / PRIORITIES GOALS / PRIORITIES
IDENTIFY YOURIDENTIFY YOURGOALS / PRIORITIES GOALS / PRIORITIES What will you sacrifice to revolve equity?
IDENTIFY YOURIDENTIFY YOURGOALS / PRIORITIES GOALS / PRIORITIES What will you sacrifice to revolve equity?
Growth • Profit • Patronage Refunds • Equipment • Price
Selection • People • Facilities • Local Ownership
IDENTIFY YOURIDENTIFY YOURGOALS / PRIORITIES GOALS / PRIORITIES What will you sacrifice to revolve equity?
Retire old equity while minimizing future liability
Growth • Profit • Patronage Refunds • Equipment • Price
Selection • People • Facilities • Local Ownership
IDENTIFY YOURIDENTIFY YOURGOALS / PRIORITIES GOALS / PRIORITIES What will you sacrifice to revolve equity?
Retire old equity while minimizing future liability
Get the support and understanding of the board and key staff
Growth • Profit • Patronage Refunds • Equipment • Price
Selection • People • Facilities • Local Ownership
KNOW WHAT YOU AREKNOW WHAT YOU AREUP AGAINST UP AGAINST
KNOW WHAT YOU AREKNOW WHAT YOU AREUP AGAINST UP AGAINST Run reports on equity by year and age
KNOW WHAT YOU AREKNOW WHAT YOU AREUP AGAINST UP AGAINST Run reports on equity by year and age
Run reports on members with no birth dates in the system
KNOW WHAT YOU AREKNOW WHAT YOU AREUP AGAINST UP AGAINST Run reports on equity by year and age
Run reports on members with no birth dates in the system.
Rationalize your best way to retire the equity and minimize future liabilities
KNOW WHAT YOU AREKNOW WHAT YOU AREUP AGAINST UP AGAINST Run reports on equity by year and age
Run reports on members with no birth dates in the system.
Rationalize your best way to retire the equity and minimize future liabilities
Age of patron vs. yearly retirement plan
Estates
WARNING: WARNING:
Most, if not all, equity management plans do not conform with the IRS rules. It’s where on the risk curve you want to be.
QUALIFIED vs.QUALIFIED vs.NON QUALIFIED EQUITYNON QUALIFIED EQUITY
QUALIFIED vs.QUALIFIED vs.NON QUALIFIED EQUITYNON QUALIFIED EQUITYDefinition: Tax liability to member vs. co-op
QUALIFIED vs.QUALIFIED vs.NON QUALIFIED EQUITYNON QUALIFIED EQUITYDefinition: Tax liability to member vs. co-op
Identify N, P, B and Non Patronage Customers
QUALIFIED vs.QUALIFIED vs.NON QUALIFIED EQUITYNON QUALIFIED EQUITYDefinition: Tax liability to member vs. co-op
Identify N, P, B and Non Patronage Customers
Example:
QUALIFIED vs.QUALIFIED vs.NON QUALIFIED EQUITYNON QUALIFIED EQUITYDefinition: Tax liability to member vs. co-op
Identify N, P, B and Non Patronage Customers
Example: Pre – 2002Purchases 250,000Patronage Rate 4%Total Patronage 10,000Cash Patronage (30%) 3,000Qualified Equity (70%) 7,000Member Tax (30%) 3,000Member Net Cash $0
Example:Pre – 2002 Post – 2002
Purchases 250,000 Purchases 250,000
Patronage Rate 4% Patronage Rate 4%
Total Patronage 10,000 Total Patronage 10,000
Cash Patronage (30%) 3,000 Cash Patronage (30%) 3,000
Qualified Equity (70%) 7,000
Non Qualified Equity (70%) 7,000
Member Tax (30%) 3,000 Member Tax (30%) 900
Member Net Cash $0 Member Net Cash $2,100
“Rule of 72” Compounding at 9%
Return for a 45 year old member
Age 45 - $2,100
Age 53 - $4,200
Age 61 - $8,400
Age 69 - $16,800
Age 77 - $33,600
In both examples the member would still have $7,000 in equity
Retirement – “I only want my stock Retirement – “I only want my stock back!” back!”
Old Policy was about 77 years old for retirement
Retirement – “I only want my stock Retirement – “I only want my stock back!” back!”
Old Policy was about 77 years old for retirement
This year Premier will be at age 69
Retirement – “I only want my stock Retirement – “I only want my stock back!” back!”
Old Policy was about 77 years old for retirement
This year Premier will be at age 69Receive 100% of the qualified equity earned
prior to 2002
Retirement – “I only want my stock Retirement – “I only want my stock back!” back!”
Old Policy was about 77 years old for retirement
This year Premier will be at age 69Receive 100% of the qualified equity earned
prior to 2002“Rule of 72”
Total Equity: $67,154 Pre-2002: $62,926
Retirement – “I only want my stock Retirement – “I only want my stock back!” back!”
Old Policy was about 77 years old for retirement
This year Premier will be at age 69Receive 100% of the qualified equity earned
prior to 2002“Rule of 72”
Total Equity: $67,154 Pre-2002: $62,926
Invest $62,926 at age 69 at 9% ROI
Retirement – “I only want my stock Retirement – “I only want my stock back!” back!”
Old Policy was about 77 years old for retirement
This year Premier will be at age 69Receive 100% of the qualified equity earned
prior to 2002“Rule of 72”
Total Equity: $67,154 Pre-2002: $62,926
Invest $62,926 at age 69 at 9% ROIAt age 77: $125,852 vs. receiving $67,154
at age 77
Retirement – “I only want my stock Retirement – “I only want my stock back!” back!”
PATRONAGE vs. PATRONAGE vs. NON PATRONAGE NON PATRONAGE SALES / PROFITS SALES / PROFITS
PATRONAGE vs. PATRONAGE vs. NON PATRONAGE NON PATRONAGE SALES / PROFITS SALES / PROFITS Build your unallocated reserve
PATRONAGE vs. PATRONAGE vs. NON PATRONAGE NON PATRONAGE SALES / PROFITS SALES / PROFITS Build your unallocated reserve
Cash (unidentified), Non patronage, <$1,500
THANK YOUTHANK YOU
Presented by: Andy Fiene General Manager Premier Cooperative