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Chapter 12. Harvest > Employee Stock Ownership Plan (ESOP)

Employee Stock Ownership Plan (ESOP)

A leveraged ESOP borrows money from the company or another financial institution to buy the company’s stock, whether all at once or in parts. The entrepreneur may or may not exit the company, but in either case he or she gets a large amount of money—in essence, the annualized stream of free cash flow in one or a few payments.

ESOPs were initially created to provide for the retirement benefits of a firm’s employees. However, about half of all ESOPs are used to create a market for the shares of current owners wishing to harvest. Where most retirement plans limit the amount of stock in any one company the plan can own, an ESOP is designed to allow employees to invest primarily in the firm’s stock. The U.S. government encourages this by providing significant tax advantages for ESOPs. ESOPs can be either leveraged or unleveraged. In an unleveraged ESOP the company makes an annual contribution to the ESOP for the employees’ retirement. The ESOP then uses the money to purchase shares of the company. An unleveraged ESOP usually provides a slower harvest for the entrepreneur.


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