How are ESOPs financed?

The table below illustrates the various financing sources available for ESOP transactions

Type Description Term Pricing
Senior debt Debt secured by the company’s assets 3-4 years LIBOR + 150-350bps
Subordinated  debt Table 5-7 years 8-10% cash interest
Seller notes Table 5-10 years 2–10% cash interest, depending on subordination, plus warrants to get to 12-14%
Company cash Table 3-20 years AFR
Royalty financing Table 8-10 years 5–12% cash and PIK interest and royalties to get to 18-22% IRR
Mezzanine debt Unsecured, subordinated debt with an equity component 8-10 years 5–12% cash and PIK interest and warrants to get to 18-22% IRR

 

 

This chart illustrates the amount of debt that is typically available to companies considering an ESOP:

 


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