alternative approaches to building and managing equity 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


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


Assumptions:

•Growth must be internal without adding additional equity through mergers, debt through financing, etc.


Assumptions:


•All sales are considered to be patronage based sales


Assumptions:



•The company is a $50 million company in year 1 and pays 30% cash patronage and 20% of earnings in retirement.


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:





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:





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:





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


1,400,000 1,540,000 4,833,080 5,316,388

Assumptions:





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


1,400,000 1,540,000 4,833,080 5,316,388 16,685,200

Assumptions:





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


1,400,000 1,540,000 4,833,080 5,316,388 16,685,200 18,356,800

Assumptions:





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?


Growth • Profit • Patronage Refunds • Equipment • Price

Selection • People • Facilities • Local Ownership


Retire old equity while minimizing future liability




Retire old equity while minimizing future liability

Get the support and understanding of the board and key staff



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


Run reports on members with no birth dates in the system


Run reports on members with no birth dates in the system.

Rationalize your best way to retire the equity and minimize future liabilities


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


Identify N, P, B and Non Patronage Customers



Example:



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



This year Premier will be at age 69



This year Premier will be at age 69Receive 100% of the qualified equity earned

prior to 2002




prior to 2002“Rule of 72”

Total Equity: $67,154 Pre-2002: $62,926





Total Equity: $67,154 Pre-2002: $62,926

Invest $62,926 at age 69 at 9% ROI





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


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

alternative approaches to building and managing equity capital

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