Goering Center for Family and Private Business

Member Newsletter Submission from First Financial Bank

Publication Date: July 31, 2025

Why More Business Owners Are Selling to Their Employees Through ESOPs

As business owners approach retirement, selling their companies to employees through an Employee Stock Ownership Plan (ESOP) is growing in popularity. Increasingly negative post-transaction experiences with private equity are leading more owners to consider an ESOP. According to a blog post from the Exit Planning Institute, many owners find themselves unhappy post-transition after selling their companies, which is a reminder that choices on the front end are important to minimize any long-term regrets. ESOPs offer a unique combination of financial, tax, and legacy benefits that can be more appealing than a traditional sale to a third party or private equity.

What Is an ESOP

An ESOP is a tax-qualified retirement plan that invests in the company’s stock. Employees become beneficial owners by receiving shares in the company through the plan—without having to invest their own money. The ESOP holds the shares in a trust on behalf of the employees and distributes them based on tenure and compensation.

Why Owners Choose an ESOP

Owners who sell to an ESOP can generate several tax benefits for the owner and employees. Notably, ESOP sales are stock sales and are taxed at capital gain rates. ESOP sellers may also be able to avoid paying taxes on the sale altogether. Additionally, ESOP companies can pay back the seller using pre-tax dollars, potentially ending up as income tax-free companies.

Many owners care deeply about their employees and the long-term future of the business. Selling to an ESOP keeps the company independent and often maintains its culture, location, and workforce.

The ESOP Association indicated that an ESOP must operate in a way that benefits the employees, making post-sale layoffs less likely. The association reports that employee-owned firms are more likely to retain employees during an economic downturn as ESOPs are 6.2 times less likely to lay off employees. Additionally, ESOPs can significantly boost productivity and employee engagement. 

Is an ESOP Right for You?

If you’re exploring succession options, an ESOP may be a good choice for you. Ideal ESOP candidates are profitable, privately held companies with 15+ employees, stable cash flow, and a strong management team. For owners who want to exit on their own terms, minimize taxes, and reward loyal employees, an ESOP can be an ideal solution.

Trusted Advice

First Financial has a dedicated National ESOP Lending Group that partners with local commercial bankers to assist owners contemplating an ESOP. Whatever path an owner chooses, First Financial Bank stands ready to assist.

Your business-related facts and circumstances will determine your path forward and should be considered carefully. There are no guarantees that any one exit strategy will outperform another. First Financial Bank does not provide legal, tax, or accounting advice.

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