Passing the Torch: Unlocking Value Through Employee Ownership

August 9, 2025

Selling a business is one of the most consequential decisions an owner will make. While many entrepreneurs consider traditional exit paths like private equity or strategic buyers, one powerful and often-overlooked option is selling to employees through an Employee Stock Ownership Plan (ESOP). An ESOP offers a unique opportunity to gain liquidity, reward your workforce, and preserve the company’s legacy—all while potentially unlocking significant tax advantages. 

The SECURE 2.0 Act further enhances the appeal of ESOPs, making them a strategic alternative for succession planning. Here’s what business owners should know. 

What Is an ESOP? 

An Employee Stock Ownership Plan (ESOP) is a qualified retirement plan that allows employees to acquire ownership interest in the company. Business owners sell all or a portion of their shares to a trust that holds stock on behalf of employees. Over time, employees earn shares in their retirement accounts, aligning their financial future with the company’s continued success. 

ESOPs are governed by the Employee Retirement Income Security Act of 1974 (ERISA) and must operate in the best interest of participating employees. 

Why Consider an ESOP? 

1. Create Liquidity While Maintaining Control 

An ESOP allows you to sell part or all of your business to a buyer that already exists—your employees—without taking the company public or negotiating with outside investors. Owners can structure the sale to retain leadership or gradually step back over time. 

Action Step: Speak with an advisor about partial vs. full sale options and the impact on your long-term role and income. 

2. Unlock Potential Tax Advantages 

ESOPs can be structured to offer considerable tax benefits. For example, if the company is a C corporation, owners may defer capital gains taxes by reinvesting proceeds in qualified replacement property (Section 1042). S corporations owned by an ESOP may pay little to no federal income tax on ESOP-owned shares. 

Action Step: Work with a tax advisor to evaluate which structure (S or C corporation) and sale terms offer the best outcome. 

3. Preserve Company Legacy and Culture 

ESOPs enable business continuity and help preserve the values, relationships, and brand you’ve built. Employee ownership fosters loyalty, retention, and productivity—turning workers into stakeholders. 

Action Step: Develop a communication plan for introducing the ESOP to your team, emphasizing their role in the company’s future. 

4. Reward and Retain Key Employees 

Ownership can be a powerful retention tool, particularly for senior leaders. ESOPs offer long-term value to employees, incentivizing performance and increasing engagement. 

Action Step: Review employee tenure, eligibility, and roles to identify how the ESOP could drive retention across your organization. 

5. Capitalize on New Incentives from SECURE 2.0 

Recent provisions in the SECURE 2.0 Act extend certain ESOP tax advantages to S corporations and create an employee ownership initiative within the Department of Labor. These changes could open ESOPs to more businesses and simplify administration. 

Action Step: Ask your advisor how SECURE 2.0 may affect your ESOP’s feasibility and compliance requirements. 

How an ESOP Transaction Works 

In most cases, the company borrows funds from a lender, then lends that money to an ESOP trust¹, which purchases the owner’s shares. The company repays the loan from earnings. The shares are allocated over time to eligible employees, who redeem them at retirement. 

This leveraged structure provides a path for owners to gain liquidity while giving the business time to pay for the transaction using future cash flow. 

Action Step: Engage a banking partner experienced in ESOP lending and structuring to assess financing options. 

What to Plan For 

Implementing an ESOP requires coordination across legal, tax, and financial experts. Consider the following when preparing: 

• Succession and pre-sale planning: Evaluate your personal goals and exit timeline. 

• Valuation and feasibility study: Determine your company’s fair market value and ESOP readiness. 

• Tax implications: Understand how federal and state tax laws apply to your sale and future income. 

• Regulatory compliance: Ensure your plan follows ERISA guidelines. 

• Long-term administration: Set up proper plan management, participant education, and reporting processes. 

Action Step: Build a team of professionals to guide you through each phase, from feasibility to execution to post-sale support. 

A Legacy Worth Leaving 

Selling to employees through an ESOP isn’t just an exit—it’s a statement about what you value. It offers a way to reward the people who helped build your business, secure your own financial future, and pass on a thriving enterprise. 

Whether you’re looking for a gradual transition or a full exit, now is the time to explore how employee ownership could align with your goals. 

Interested in learning if an ESOP is right for your business? Contact our team for a confidential consultation. 

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Disclaimer: Commercial banking services offered through First Western Trust Bank, Member FDIC 

1. Trust products and services are Not FDIC Insured, Not guaranteed by the Bank, May Lose Value 

This content is for informational purposes only and does not constitute legal or tax advice. Please consult your legal or tax advisor for specific guidance tailored to your situation. First Western Trust Bank cannot provide tax advice. Please consult your tax advisor for guidance on how the information contained within may apply to your specific situation.