Chapter 9

Financial Considerations

This chapter examines the many facets of financial matters as they relate to the installation of an employee stock ownership plan (ESOP). We assume that an ESOP feasibility study has been completed or is in process (either informal or formal), and questions regarding how the transaction will be financed are being raised.

We will examine the many sources of financing an ESOP transaction. Depending on the facts and circumstances, business owners may enjoy a wide range of options, including self-funding strategies and the use of outside financial institutions. The array of options is very broad.

Financing Overview for ESOPs

There are many sources of funding for an ESOP. For the purposes of this book, we have conveniently classified the sources as either internal or external. Internal sources are understood to include the employer. External sources include a range of possibilities, including financial institutions or, perhaps, shareholders of the employer (seller financing). It is common for the ESOP to borrow money from either an internal or external source to purchase employer securities.

ESOP Loan Exemption

Typically, qualified employee benefit plans are prohibited from borrowing money from a party in interest or to have a loan guaranteed by a party in interest to purchase the stock of the employer. This is a prohibited transaction. This prohibition would make it virtually impossible for an ESOP to acquire employer securities. A special exemption ...

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