February 11, 2026

ESOP Boot Camp, Part 5: How ESOPs Are Financed

How are ESOP transactions actually financed?

In Part 5 of ESOP Boot Camp, Trevor explains the two primary financing methods used in ESOP transactions: outside bank financing and seller financing.

🎙️ Listen to the Episode

Welcome to ESOP Boot Camp Part 5

Hi everyone.

Welcome to ESOP Radio.

Thank you for joining episode five of our ESOP Bootcamp how to Finance your ESOP.

Our goal is to give you the owner, CEO, or CFO of a successful business.

The lowdown on Esops in a quick, straightforward manner to save you time.

Guess what? Your time is valuable.

We’re not providing investment advice today.

I’m Trevor Gilmore, CEO of Menke.

Since 1974, we have done thousands of esops.

We’ve seen it all as an Esop ourselves.

We are also Esop native.

Today we’ll cover the two ways Esops are financed.

The two ways ESOPs are financed

Number one, outside financing by a lender.

And number two, seller financing.

It’s going to kick it off now.

So in our first example we raised

20 million of outside bank financing for a client.

Overall Esop value.

And this is a negotiation value was 50 million.

Example: combining bank financing with seller notes

So to do the bank process we start off with what we call our Esop fit analysis.

Taking a look at your cash flows historical and projections

and going through and seeing what are the covers ratios

and what the balance sheet and cash flows can truly support.

From there, we talked to your incumbent bank

and also do a bank shop to find the right lender.

Who’s going to be the right long term partner for a business like yours.

Now, in the future with this client, we assess that 20 million

was the appropriate amount and the company could cash flow nicely.

Family trust owned all the shares through the entire process.

And there’s some negotiation here back and forth.

We’re able to successfully negotiate an interest rate below prime

and also favorable interest rates on the excess cash

held on the balance sheet and favorable covenants as well.

This client had very clean financials.

Think audits going back several years unqualified as well.

So we’re talking about clean financials

and a top notch management team ready to take the company into the future.

So in other words, is it very much a bankable company.

So this 20 million bank financing package was possible.

Fast forward to the transaction.

Bank closes, transaction closes and the family trust gets the 20 million I close.

Now, you might ask here, what about the other 30 million there?

Seller notes as long-term annuities

They talked about a $50 million price.

Well, the family trust carried what is called a seller note over

several years. Seller notes

in conjunction with bank financing often are subordinated to the bank.

The beauty, though, is that the family trust

and many of our clients view the seller notes as a long term annuity.

So in essence, you get a down payment from the bank

and you have this annuity kicking out market rate interest,

maybe a IRR that was a bit higher as well to compensate you for the risk.

Second example $15 million company.

When all–seller-financed ESOPs work

We did no bank financing for because the seller was comfortable

with carrying a $15 million seller note going for seller notes.

Definitely an easier process versus raising bank financing.

We raise bank financing for clients all the time.

Last year, we raised amounts between 2 and 50 million for our clients with banks.

However, when you go all SA notes,

the transaction can be a bit smoother and quicker because you don’t

have the bank doing their due diligence, plus the banks legal team and so on.

Part of our role in assessing what makes the most sense for you

How lenders evaluate ESOP transactions

and your company is assessing the overall bankability

of your business and determining if it makes sense to conduct a bakeshop.

But it’s not necessary.

Things come into play, such as your reinvestment horizon,

your liquidity needs,

and what makes sense with your long term trust and estate planning.

In summary, all Esop transactions are financed by one of two ways

either with the outside lender meaning the bank or with seller financing.

Let’s talk a bit about banks to lend esops.

So that universe is pretty wide, but there’s some niche players as well.

Some think large national and international banks,

you know, the quote unquote too big to sells.

They often have Esop financed teams.

However, they have usually short criteria and it changes all the time

in terms of what industry, etc. they want to lend to.

Types of lenders that finance ESOPs

Also, there are very sophisticated regional lenders who love esops.

Our job is to play matchmaker and find the right lender with the right package.

With our clients, some of our clients

have gone through this process in the past and that makes it much easier.

Of course, going through this the second time, many of them

have not gone through this process, and that’s where expertise kicks in here.

There are also mezzanine lenders and private credit funds out there

that like to lend Esop companies.

You see some of that.

Some of them will also often go higher than a senior bank.

So in this example maybe we could have got, you know, 40 million or so to 20.

However, the interest rates are much higher.

And it’s also more risky for the business.

So you have to weigh the pros and cons and figure out what makes the most sense.

There is also some SBA financing out there as well.

Again, interest rates going down the SBA path, typically a bit higher,

and origination fees are a bit higher as well.

So in summary you have a few key financing options out there.

Key takeaways and what’s next in ESOP Boot Camp

Main thing is what is the quality of your financials.

Do you have reviewed or audited statements.

Banks are going to want to see that.

How stable is the earnings and what’s the plan for the future.

And again these are all components that we take a look at

and analyze and drive that decision in our easy, thoughtful analysis.

Thanks for joining today. Hope you learned something new.

Check us out on LinkedIn.

ESOP Radio. Menke. Myself, Trevor Gilmore.

And join us for episode six.

Take care everyone. Have an awesome day.

Bank Financing

Lenders evaluate:

- Cash flow stability
- Debt coverage ratios
- Financial history

Specialized ESOP lenders understand the structure and fiduciary framework.

Seller Notes

Seller financing often:

- Complements bank financing
- Functions as long-term annuity income
- Aligns incentives post-transaction

In some cases, ESOPs are fully seller-financed.

Why Structure Matters

Financing decisions affect:

- Risk allocation
- Owner liquidity timing
- Long-term sustainability

Continue the ESOP Boot Camp Series

This episode is Part 5 of the 10-part ESOP Boot Camp series.

Next:
ESOP Boot Camp, Part 6: ESOP Valuation Explained Simply

Explore the full series at:
menke.com/esop-radio

About ESOP Radio

ESOP Radio is the official ESOP podcast from Menke — where real stories of growth, succession, and long-term wealth building are told.

Hosted by Trevor Gilmore and Ben Spadt, the show features conversations and educational episodes designed to help business owners better understand employee ownership.

Disclaimer

This podcast is provided for educational purposes only and does not constitute legal, tax, investment, or fiduciary advice.

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Free live webinar · Wednesday, September 30th, 2026 · 10:00–11:30 AM PT / 1:00–2:30 PM ET

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Why 2026 is the Time for ESOPs

Strong companies are using ESOPs to play offense. With rates stabilizing and talent still tight, employee ownership is delivering a durable edge:

- Founder Liquidity—On Your Terms. Create a market for your shares without selling to private equity or competitors.
- Major Tax Efficiency. Enable capital‑gains deferral for selling shareholders (Section 1042 eligibility) and reduce or even eliminate ongoing corporate income tax for S‑Corporation ESOPs—freeing cash for growth.
- Talent Magnet. Meaningful employee ownership boosts engagement, retention, and performance—without relying solely on wage increases.
- Resilient Margins. ESOP tax advantages help counter wage pressure, input costs, and tariffs—so more operating cash flows to strategy.
- Control & Culture Intact. Transition ownership while keeping leadership and values in place.. Transition ownership while keeping leadership and values in place.

Bottom line: ESOPs create a rare win‑win‑win—for owners, the business, and employees.

What You’ll Learn

ESOP 101—Modern Playbook
How ESOPs work in 2026, who qualifies, deal structures, and timelines.

Tax Strategies that Change the Math
Capital‑gains deferral, corporate tax reduction/elimination for S‑Corp ESOPs, deductible contributions, and cash‑flow modeling.

Talent & Culture
Retention without across‑the‑board raises; ownership communications that actually move the needle.

Protecting Margins
How ESOP incentives can offset cost inflation and support reinvestment.

Valuation & Financing in Today’s Market
Bank/seller notes, mezzanine options, rate considerations, and why “bankable ESOPs” are closing now.

Governance & Control
Board, trustee, and management roles—what really changes (and what doesn’t).

Who Should Attend

- Business Owners planning an exit, partial sale, or recapitalization
- CFOs evaluating capital structure and tax strategy
- Advisors & Succession Planners guiding owner‑led companies
- HR & ESOP Committee Members building engagement around ownership

Agenda (90 Minutes)

1. Welcome, Speakers & Why ESOPs in 2026 (5 min)
  Quick orientation; who Menke is and why ESOPs are winning right now.
2. ESOP Basics & Business Owner Benefits (10 min)
  What an ESOP is; liquidity, diversification, succession, productivity.
3. Myth‑Busting: What ESOPs Do—and Don’t—Require (5 min)
  No, you don’t have to sell 30%+, borrow big, or give up control.
4. Deal Structures & Transaction Paths (10 min)
  Cash‑contribution (pay‑as‑you‑go), leveraged (bank/seller notes), and stock contribution; when each fits.
5. Typical Scenarios & Outcomes (10 min)
  Gradual sales, minority/majority sales, 100% buyouts, and recap strategies.
6. Who’s a Strong Fit (and Common Constraints) (5 min)
  Profitability, team/transition readiness, industry notes.
7. Tax Strategy Deep Dive (10 min)
  S‑Corp ESOP distribution savings; C‑Corp §1042 capital‑gains deferral; entity‑path options.
8. Valuation & Pricing vs. Third‑Party Sales (8 min)
  FMV standards, control vs. minority value, practical comparisons.
9. Financing the ESOP (8 min)
  Bank market overview, seller paper, balance‑sheet effects, cash‑flow modeling.
10. Plan Operations & Employee Communications (8 min)
  Eligibility, vesting, distributions, disclosures, and how transparency drives results.
11. Culture, Engagement & Measured Performance Uplift (6 min)
  What changes on day 2; tying ownership to productivity.
12. Roadmap & Next Steps (3 min)
  Feasibility, design/adopt, contributions, and timing the sale.
13. Live Q&A (2 min)

Hear From Past Attendees

“I came in skeptical. I left with a concrete roadmap and the math to brief our board.”

— Mark T., CFO, Manufacturing

“This clarified our exit plan and showed how we can reward employees at the same time."

— Susan D., Founder & CEO, B2B Services Firm

Your Presenter: Phil DeDominicis

Phil DeDominicis is an ESOP strategist and M&A advisor who has guided 300+ companies through ESOP formations, financing, and transactions over 20+ years at Menke & Associates. He specializes in selling ESOP‑owned businesses to financial or strategic buyers and in helping ESOP companies acquire other businesses.

Before Menke, Phil spent 14 years in investment banking M&A at Morgan Stanley and Salomon Smith Barney, advising middle‑market companies on change‑of‑control transactions. He holds a B.S. in Chemical Engineering from the University of Delaware (1985) and an MBA in Finance & Accounting from UCLA Anderson (1989). Phil currently serves on six for‑profit and not‑for‑profit boards.

What Phil will cover:

- Where ESOPs win in 2026 (tax, talent, and control)
- Owner liquidity paths: minority, majority, and 100% sales
- Financing options and what lenders look for
- Valuation reality vs. third‑party sales
- How to prep a board, trustee, and employees for a successful close

Reserve Your Spot Now

Seats are limited. Save yours now and receive the ESOP Feasibility Checklist.

Wednesday, September 30th, 2026

10:00AM – 11:30AM PT
11:00AM – 12:30PM MT
12:00PM – 1:30PM CT
1:00PM – 2:30PM ET

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No cost. Suitable for companies with $5M–$500M+ in revenue across construction, manufacturing, services, distribution, tech, and more.

FAQ (Quick Hits)

- Do I lose control? No—most ESOPs preserve day‑to‑day control with your leadership team and board.
- Is this only for certain industries? ESOPs work across sectors when cash flow is stable and leadership continuity matters.
- Can we do a partial sale? Yes—stage liquidity over time while capturing tax benefits.

READY FOR AN ESOP NOW?

Interested in finding out how an ESOP could work for your company?

For a free preliminary analysis, just fill out our ESOP Feasibility Questionnaire.

FREE ANALYSIS

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September 17, 2026

For fifty years, the hardest question in employee ownership was not how to finance the deal or how to structure the tax benefits. It was what “adequate consideration” actually meant. Congress has now answered it — and the answer is narrower, and more useful, than the headlines suggest.

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August 31, 2026

A seller who elects Section 1042 on a $100 million ESOP transaction can defer roughly $33 million in capital gains tax, potentially for life. The same election, structured without care, can leave that seller carrying leverage on a securities portfolio for decades. The difference is in how the portfolio is built.

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August 3, 2026

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February 11, 2026

ESOP Boot Camp, Part 5: How ESOPs Are Financed

🎙️ Listen to the Episode

Welcome to ESOP Boot Camp Part 5

The two ways ESOPs are financed

Example: combining bank financing with seller notes

Seller notes as long-term annuities

When all–seller-financed ESOPs work

How lenders evaluate ESOP transactions

Types of lenders that finance ESOPs

Key takeaways and what’s next in ESOP Boot Camp

Bank Financing

Seller Notes

Why Structure Matters

Continue the ESOP Boot Camp Series

About ESOP Radio

Share this article:

Learn why an ESOP is better for You, your Business, and your Employees

Upcoming Web Seminar

Learn how ESOPs fuel growth, reduce taxes, and power succession—without giving up control.

Why 2026 is the Time for ESOPs

What You’ll Learn

Who Should Attend

Agenda (90 Minutes)

Hear From Past Attendees

Your Presenter: Phil DeDominicis

What Phil will cover:

Reserve Your Spot Now

FAQ (Quick Hits)

READY FOR AN ESOP NOW?

Interested in finding out how an ESOP could work for your company?

For a free preliminary analysis, just fill out our ESOP Feasibility Questionnaire.

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