Essentially, a leveraged ESOP is an intermediary in a loan transaction. Rather than borrow the money directly, a company borrows it through an ESOP. The steps involved in a typical transaction include:

1. The company sets up a trust. The trustee can be the selling shareholder, members of the management team, a combination of the two, or an outside trustee. The trust then borrows money from a lender.

2. The trust uses the borrowed funds to purchase the seller’s stock.  

3. The company repays the loan by making tax-deductible contributions to the trust, which the trust pays to the lender.

4. The stock is put into a suspense account, where it is released to employee accounts as the loan is repaid. When employees leave the company or retire, the company pays them the stock purchased on their behalf.