In a typical leveraged ESOP formation, who does a bank directly loan money to?

In a typical leveraged Employee Stock Ownership Plan (ESOP) formation, a bank directly loans money to the company. This loan is used to finance the purchase of the company’s stock, which is then allocated to the ESOP Trust on behalf of the employees.

When the bank provides the loan to the company, the company uses those funds to buy back shares from the sellers, who could be existing owners or shareholders. This process allows the employees to gradually acquire ownership of the company through the ESOP, while the loan is paid back over time, often using the company's future cash flows.

In this context, the role of the bank is primarily to lend to the company, which then orchestrates the transaction with the ESOP Trust and the sellers. This structure is key to how leveraged ESOPs function, facilitating employee ownership while addressing the financial aspects through the company’s capabilities and resources.