Branching OutAn employee stock ownership plan is more than just a great way to boost morale-it's also a cheap source of growth capital.

When direct marketing agencyCreative Direct Response Inc.decided to expandits nonprofit fund-raising business, the Crofton, Maryland, firmbegan looking for a company to acquire. It found Jeremy Squire& Associates, an Oakton, Virginia, fund-raising company. JeremySquire, the firm's owner, wanted to sell but was concernedabout his employees. So Creative Direct Response offered a buyoutproposal that was not only financially attractive, but also a meansto reward loyal employees.

The $5.5 million firm urged Squire to sell his company stock tohis employees through an Employee Stock Ownership Plan, or ESOP.Creative Direct Response would pay Squire for the $3 million stockpurchase, acquiring the company as a wholly owned subsidiary.Because Squire provided financing, he could collect interest thatwould normally go to a bank. And since his company was a Ccorporation, he could defer capital gains taxes by using proceedsfrom the sale to buy securities of U.S. companies, a permissiblepractice when a business sells at least 30 percent of its stock toits employees.