However, for private companies that are not publicly traded, where there is a substantial investment by an executive, the accounting is the same as for real stock in a publicly traded company. So there can be an accounting advantage, or, as mentioned, you may have an accounting hit. The candidates for formula value stock are almost everyone, according to Kuhns. It's a way of providing an equity interest in that business unit to concentrate or focus people's efforts on the success of that particular unit. Acquisitions, mergers and divestitures clearly have a role for formula value stock.
Leveraged buyouts are a candidate, as well as subsidiaries of foreign owned companies.
On the other hand, if the culture and management process are not willing to accept an increased role of management and employees in governing the business, it's not going to work. It is easier to implement an equity program in a fairly new company that doesn't have a culture firmly in place, Kuhns noted. If you are trying to implement it in an old, stodgy organization, where things aren't clear and information hasn't been shared for a long time, it's a lot harder to do, particularly in the context of today's environment where management is focusing on external matters more than internal ones. Equity programs aren't always available and have their disadvantages as well, Kuhns pointed out. Among other things, if you're in a company and want to have a stock program, you might have a capitalization restriction from a lending institution, which precludes issuing equity.