Capital and Financing Options in ESOP Transactions

Many ESOP transactions are financed either by loans from banks or a combination of bank loans and subordinated promissory notes issued to the sellers in exchange for shares. In some cases, other forms of capital that are in a junior position to senior bank debt are raised to provide additional cash proceeds to the sellers. These forms of capital may include second-lien debt, mezzanine debt (unsecured debt subordinated to bank debt) or structured equity (unsecured debt subordinated to senior and mezzanine debt). David Solomon discusses these forms of capital in Chapter 7 of Leveraged ESOPs and Employee Buyouts.