Frequently Asked Questions

Employee Ownership FAQs

Common questions about employee stock ownership plans (ESOPs), employee ownership trusts (EOTs), and other forms of employee ownership, from the basics to technical topics.

This FAQ is written primarily for business owners, managers, and advisors involved in setting up or running an employee ownership plan. If you're an employee at an ESOP company looking to understand your own benefits and rights, see our articles on Working at an ESOP Company and The Rights of ESOP Participants.

NCEO employee ownership FAQ hero (keyboard)

Who can lend to an ESOP?

Anyone can lend to an ESOP, as long as the transaction is at least as favorable to the plan as an arm's-length transaction. While commercial lenders are the most common sources of finance, sellers of stock, the company itself, insurance companies, brokerage firms, and investment bankers all can and do loan to ESOPs. The company can loan funds to the ESOP if it has cash; sellers can also take a note back from the ESOP.

If sellers loan to an ESOP, they may be not be able to take full advantage of the "ESOP rollover" provision that allows them to defer tax by reinvesting in other securities. The law specifies that a seller to an ESOP has 12 months after the sale and three months before it to reinvest the proceeds in securities of qualifying companies. In a seller-financed transaction, the seller may be getting paid in annual installments. The seller cannot just reinvest these installments and qualify. Instead, only the amount actually reinvested during the 15-month period qualifies. As a result, the seller must have other funds to reinvest to make this work. In other words, the IRS does not care whether the reinvested amount actually came from the sale to the ESOP, but it does limit the deferral to the dollar amount reinvested within the qualifying period.

There is a work-around, however. Sellers can borrow money to purchase long-term, non-callable “ESOP notes.” These are special bonds created for this purpose. They cannot be called for 30 years or more. A bond being called would trigger a sale, and that would trigger taxes, so the long-term nature of the bond preserves the deferral. Generally, banks will loan about 85% of the cost of buying the bonds. As the seller note is repaid, the seller uses these funds to pay the bank loan. The interest rate on the bonds is usually a bit lower than the interest rate to borrow to buy them, so there is a "negative carry.” As the loan is repaid, the seller can use the bond as collateral to buy other investments. This strategy has proven effective for many sellers, but the transaction costs make it worth doing only for larger deals. There is also at least one specialized fund that allows the seller to buy a portfolio of 400 qualifying securities instead of the bonds. The portfolio earns more like an equity/bond mixed mutual fund, so usually returns a higher rate than the loan to buy the securities.

There is also an effort underway (as of 2026) to create a secondary market for seller notes, meaning the seller could sell the note for probably 85% to 90% of its face value and then have the money up front to invest in qualifying securities for the deferral.

For more details, see Selling to an ESOP and Financing the Deal and the ESOP Pre-Feasibility Toolkit.

Link to this FAQ Topic: Financing an ESOP