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Published byLynn McBride Modified over 9 years ago
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Alternative Approaches To Building And Managing Equity Capital
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FACE THE COLD, HARD FACTS OF EQUITY MANAGEMENT
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Understand why you have equity in the first place
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FACE THE COLD, HARD FACTS OF EQUITY MANAGEMENT Understand why you have equity in the first place Is it a sustainable model in your current and future business environment?
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EARNINGS GROWTH NEEDED TO SUSTAIN A PATRONAGE PROGRAM
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Assumptions: Growth must be internal without adding additional equity through mergers, debt through financing, etc.
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EARNINGS GROWTH NEEDED TO SUSTAIN 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
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EARNINGS GROWTH NEEDED TO SUSTAIN 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.
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EARNINGS GROWTH NEEDED TO SUSTAIN A PATRONAGE PROGRAM Year 1 Sales50,000,000 % Profit4% $ Profit2,000,000 Cash Patronage600,000 Cash Retirement400,000 Future Retirement Equity1,400,000 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.
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EARNINGS GROWTH NEEDED TO SUSTAIN A PATRONAGE PROGRAM Year 1Year 2 Sales50,000,00055,000,000 % Profit4% $ Profit2,000,0002,200,000 Cash Patronage600,000660,000 Cash Retirement400,000440,000 Future Retirement Equity1,400,0001,540,000 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.
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EARNINGS GROWTH NEEDED TO SUSTAIN A PATRONAGE PROGRAM Year 1Year 2Year 13 Sales50,000,00055,000,000172,610,000 % Profit4% $ Profit2,000,0002,200,0006,904,400 Cash Patronage600,000660,0002,071,320 Cash Retirement400,000440,0001,380,880 Future Retirement Equity 1,400,0001,540,0004,833,080 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.
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EARNINGS GROWTH NEEDED TO SUSTAIN A PATRONAGE PROGRAM Year 1Year 2Year 13Year 14 Sales50,000,00055,000,000172,610,000189,871,000 % Profit4% $ Profit2,000,0002,200,0006,904,4007,594,840 Cash Patronage600,000660,0002,071,3202,278,452 Cash Retirement 400,000440,0001,380,8801,518,968 Future Retirement Equity 1,400,0001,540,0004,833,0805,316,388 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.
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EARNINGS GROWTH NEEDED TO SUSTAIN A PATRONAGE PROGRAM Year 1Year 2Year 13Year 14Year 26 Sales50,000,00055,000,000172,610,000189,871,000595,900,000 % Profit4% $ Profit2,000,0002,200,0006,904,4007,594,84023,836,000 Cash Patronage 600,000660,0002,071,3202,278,4527,150,800 Cash Retirement 400,000440,0001,380,8801,518,9684,767,200 Future Retirement Equity 1,400,0001,540,0004,833,0805,316,38816,685,200 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.
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EARNINGS GROWTH NEEDED TO SUSTAIN A PATRONAGE PROGRAM Year 1Year 2Year 13Year 14Year 26Year 27 Sales 50,000,00055,000,000172,610,000189,871,000595,900,000655,600,000 % Profit 4% $ Profit 2,000,0002,200,0006,904,4007,594,84023,836,00026,224,000 Cash Patronage 600,000660,0002,071,3202,278,4527,150,8007,867,200 Cash Retirement 400,000440,0001,380,8801,518,9684,767,2005,244,800 Future Retirement Equity 1,400,0001,540,0004,833,0805,316,38816,685,20018,356,800 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.
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FACE THE COLD, HARD FACTS OF EQUITY MANAGEMENT Understand 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?
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IDENTIFY YOUR GOALS / PRIORITIES
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What will you sacrifice to revolve equity?
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IDENTIFY YOUR GOALS / PRIORITIES What will you sacrifice to revolve equity? Growth Profit Patronage Refunds Equipment Price Selection People Facilities Local Ownership
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IDENTIFY YOUR 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
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IDENTIFY YOUR 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
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KNOW WHAT YOU ARE UP AGAINST
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Run reports on equity by year and age
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KNOW WHAT YOU ARE UP AGAINST Run reports on equity by year and age Run reports on members with no birth dates in the system
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KNOW WHAT YOU ARE 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
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KNOW WHAT YOU ARE 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
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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.
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QUALIFIED vs. NON QUALIFIED EQUITY
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Definition: Tax liability to member vs. co-op
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QUALIFIED vs. NON QUALIFIED EQUITY Definition: Tax liability to member vs. co-op Identify N, P, B and Non Patronage Customers
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QUALIFIED vs. NON QUALIFIED EQUITY Definition: Tax liability to member vs. co-op Identify N, P, B and Non Patronage Customers Example:
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QUALIFIED vs. NON QUALIFIED EQUITY Definition: Tax liability to member vs. co-op Identify N, P, B and Non Patronage Customers Example: Pre – 2002 Purchases 250,000 Patronage Rate 4% Total Patronage 10,000 Cash Patronage (30%) 3,000 Qualified Equity (70%) 7,000 Member Tax (30%) 3,000 Member Net Cash $0
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Example: Pre – 2002Post – 2002 Purchases 250,000 Patronage Rate 4% Total Patronage 10,000 Cash Patronage (30%) 3,000 Qualified Equity (70%) 7,000Non Qualified Equity (70%) 7,000 Member Tax (30%) 3,000Member Tax (30%) 900 Member Net Cash $0Member 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
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Retirement – “I only want my stock back!”
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Old Policy was about 77 years old for retirement Retirement – “I only want my stock back!”
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Old Policy was about 77 years old for retirement This year Premier will be at age 69 Retirement – “I only want my stock back!”
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Old Policy was about 77 years old for retirement This year Premier will be at age 69 Receive 100% of the qualified equity earned prior to 2002 Retirement – “I only want my stock back!”
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Old Policy was about 77 years old for retirement This year Premier will be at age 69 Receive 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 back!”
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Old Policy was about 77 years old for retirement This year Premier will be at age 69 Receive 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 back!”
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Old Policy was about 77 years old for retirement This year Premier will be at age 69 Receive 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 At age 77: $125,852 vs. receiving $67,154 at age 77 Retirement – “I only want my stock back!”
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PATRONAGE vs. NON PATRONAGE SALES / PROFITS
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Build your unallocated reserve
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PATRONAGE vs. NON PATRONAGE SALES / PROFITS Build your unallocated reserve Cash (unidentified), Non patronage, <$1,500
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THANK YOU Presented by: Andy Fiene General Manager Premier Cooperative
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