The leveraged ESOP is a great example of debt financing. The unleveraged plan involves using internal capital to finance the purchase. The unleveraged plan is definitely the preferable one. ESOPs have two main uses. Sometimes they are used to buy out a retiring owner.
Most businesses have no plans for after the departure or retirement of the owner.
If the company were to repurchase the shares then the proceeds would be taxed like ordinary income. The ESOP can provide a market for the equity of the retiring owner. The other use of the ESOP is to provide an employee incentive. Eighty-one percent believed the ESOP was a wise decision that helped out the company. Several other studies have shown a definite positive relationship between the ESOP and the stock of the company.