Leveraged ESOP: What Does It Mean?

A leveraged ESOP is an Employee Stock Ownership Plan that borrows money to buy company shares, with the company repaying the loan over time. It's a common way for business owners to sell to their employees, since the ESOP can buy a large block of stock all at once. Shares bought with the loan sit in a holding account and are released to employee accounts gradually as the loan is paid down.

The company makes tax-deductible contributions to the ESOP trust to cover the loan payments, which can make this a tax-efficient way to finance an ownership transition. For employees, the debt isn't personal: you never owe anything on the loan. The trade-off is that heavy borrowing can strain the company's finances, which in turn affects the value of the shares in your account.