Alphabet Soup – The ABCs of ESOPs
If you have been reading my blog for the past few weeks you may have noted that I have spent quite a bit of time talking about the benefits of an ESOP. This post is going to look at how an ESOP is formed.
ESOPs are unique. Each is designed around the needs of the seller, the company, and the employees. There are some commonalities however. Let’s look at a simple leveraged ESOP transaction (a leveraged transaction is one where external financing is obtained).
They say a picture is worth a thousand words. The following graphic can help explain the workings of the ESOP transaction.
The initial transaction:
- Company establishes the ESOP (a retirement plan)
- Company borrows money from the bank
- Company loans money to the ESOP
- ESOP uses funds to purchase stock from the shareholder(s)
- Company makes annual cash contributions to the ESOP
- ESOP repays company loan
- Company repays bank loan
- Unencumbered shares are allocated to participants
Details are important. You can find out more by reading the article I wrote. Click here to check it out.
Your turn…tell me what you think in the comments section below. I read and respond to every comment!
In addition to blogging here, I also tweet regularly about topics of interest to ESOPs @jlripperger.
No investment strategy, such as asset allocation or diversification, can guarantee a profit or protect against loss in periods of declining values. Company stock is not a pooled investment. Stock may experience greater volatility and should not be directly compared to investment options that have a more diversified investment mix. It is not intended to serve as a complete investment program by itself.
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