Why Excluding Employee Ownership Leaves Succession Advice Incomplete

It is well known that the United States is in the middle of what will be the largest transfer of wealth and businesses to the next generations of family and leadership. What is less known is how limited many owners’ understanding of their options are. According to a recent study from the Exit Planning Institute, only 53% of baby boomer owners think they are aware of all their exit options and 85% have no business transition plan. As a result, many owners do not know how to achieve what is most important to them in an exit.

When discussing options, advisors often raise selling to a strategic buyer or private equity firm, exploring a dividend recapitalization, selling to management, or passing on ownership to the next generation; an Employee Stock Ownership Plan (ESOP) is often left unmentioned in those conversations. It’s not because they are inappropriate, but because they are misunderstood and undertaught. However, by forgoing the ESOP conversation, advisors are failing to provide their clients with a credible alternative that protects legacy, provides liquidity, and supports long-term independence.

Advisors who hesitate to raise ESOPs typically point to complexity and regulatory exposure under ERISA, or concerns that sellers do not get a fair price. Some of these reservations are not unfounded; ESOPs require careful structuring, ongoing compliance, and consideration of all of a seller’s objectives. ESOPs are also primarily debt-financed and introduce long-term repurchase obligations as employees leave.  However, in many cases, the hesitancy to raise employee ownership reflects incomplete assumptions rather than structural impossibility. As with trusts, M&A, or any other reorganization, the issue is more whether the right expertise is engaged early.

Conversely, by omitting an ESOP from the list of potential alternatives, advisors are leaving a path unexplored. Their clients may pursue suboptimal exits, then losing an opportunity to be proactive and risk being viewed as reactive or caught flat footed. ESOPs can achieve some of the most critical succession goals that owners have. After decades of seeing the result of sales to private equity, strategic, or foreign buyers, many owners are prioritizing different objectives:

Legacy

  • Ownership transition that does not require layoffs or moving the company
  • Designed to supplement rather than replace existing culture

Liquidity

  • Partial or staged liquidity rather than a forced 100% sale
  • Ability to tailor cash at close, seller notes, and ongoing returns

Independence

  • No significant changes to day-to-day operations
  • No forced integration, restructuring, or cultural disruption

Tax Efficiency

  • For a 100% ESOP-owned S-Corp, the company pays no federal income taxes
  • Potential capital gains deferral for sellers under Section 1042 (C Corporations)

Raising the benefits and considerations early enhances credibility, fiduciary completeness, and client retention. Depending on the practice area, discussing employee ownership may have additional benefits.

For accountants and tax advisors, there is the opportunity to adjust capital gains planning and corporate structure years in advance. Wealth managers can start succession discussions earlier and be more thoughtful in designing an estate planning strategy. ESOPs provide lenders with long-term credit relationships and the ability to keep an existing client. Attorneys can demonstrate holistic thinking and implement strategies before value solidifies. Regardless, raising the concept earlier as one potential option, without pushing it as the only strategy, builds trust.

It is not critical to know how to structure an ESOP, interpret ERISA, or evaluate how it will impact a company’s finances. To be a trusted advisor, one needs to know when an ESOP potentially fits, when to introduce the concept at a high level, and when to bring in an expert who can be a partner in evaluating it.

ESOPs will never be a universal solution, but they are one arrow in the quiver to address long-term ownership and succession, and they are relevant far more often than many assume. Minimally, advisors should ask: “Have you ever considered employee ownership as part of your succession plan?” Raising the question expands client thinking, enhances the advisors relevance, and leads to better succession outcomes for owners.

For many advisors, not raising an ESOP is the real risk.