Selling to employees: The underappreciated exit strategy
March 2, 2026 | 6 minute read
Key takeaways
- As an exit strategy, an employee stock ownership plan (ESOP) provides business owners — and their employees — with several distinct advantages.
- ESOPs can reward employees, create business continuity, retain a role for the owner and provide liquidity to the owner — potentially with tax advantages for all parties.
- ESOP transactions require regulatory and technical knowledge and experience, underscoring the need for assembling the right partners.
Every business owner must one day consider what happens to the company when they’re ready to walk away. For some looking ahead to their exit from the company, an employee stock ownership plan (ESOP) has many unique benefits.
“In its simplest terms, an ESOP involves the sale of some or all of a business to its employees,” explains Brian Roth, National Executive, ESOP Finance and Advisory at Bank of America. A broad cross section of the company’s workers generally must be eligible to participate in the plan. Eligible employees accumulate shares of company stock in their ESOP retirement accounts. When they retire or leave the company, the company typically buys back the shares, and the cash received can help fund employees’ retirement.
“An ESOP keeps the company’s future in the hands of those who have the most to gain if it thrives, and it allows the owner to reward valued employees for their hard work.”
“From a business owner’s perspective, an ESOP offers several distinct potential advantages,” says Roth. “It keeps the company’s future in the hands of those who have the most to gain if it thrives, and it allows the owner to reward valued employees for their hard work.
“That could reduce turnover, increase productivity and help the company recruit and retain talent,” he adds.
Roth cites several other reasons an ESOP might be appealing: An ESOP provides a ready buyer for the company, and the applicable laws require that the company be sold at fair-market value; it enables the company to keep its financial and strategic information confidential; sellers have the option of staying involved in the company’s governance and operations; and if certain conditions are met, sellers may be able to defer part or all capital gains taxes on the sale. Also, employees receive tax-favored treatment through their tax-qualified retirement accounts in the ESOP.
How selling to employees works
Most ESOPs are financed with loans that leverage company assets. The company typically borrows money from a bank and then lends the proceeds to an ESOP trust (ESOT), which uses those funds to buy the selling shareholders’ shares. The stock that is purchased is initially held in the ESOT’s “suspense account,” and the shares are allocated to the employees as the loan to the ESOP is repaid.
To qualify as an ESOP, the ESOT must be operated in the best interest of employees and otherwise comply with the Employee Retirement Income Security Act of 1974 (ERISA). If the company is an S corporation that is 100% owned by the ESOP, the company’s income may be federal (and in some cases state) income tax-free. “This feature, of course, might help provide the business with breathing room enough to repay the loan without jeopardizing investments it may wish to make to grow the company or increase productivity,” Roth says.
In recent years, there have been new incentives for business owners to opt for an ESOP. For example, effective for plan years beginning after December 31, 2027, the SECURE 2.0 Act will extend some tax advantages to owners of S corporations that were previously available only to C corporation shareholders, and it will establish an employee ownership initiative within the Department of Labor to promote employee ownership. “Over time these rather technical changes could help make employee ownership, which has been relatively rare as a business succession strategy, more appealing to a wider range of business owners,” Roth says.
The tax rules governing ESOPs are highly complex and subject to many special rules and exceptions. Consult a tax advisor before engaging in an ESOP transaction.
How to find the right ESOP partners
While an ESOP can be a compelling and uniquely advantageous way for an owner to build a graceful exit from their company, such transactions and their aftermath require regulatory and technical knowledge and experience. For a successful execution that delivers all the benefits that an ESOP can potentially provide, you’ll need to assemble a team of partners with the requisite depth of expertise in this very particular corner of the business succession landscape.
You’ll benefit from working with a team of professionals with experience and knowledge about these key considerations:
Federal regulations for retirement plans. An ESOP is considered a defined contribution retirement plan subject to the requirements of ERISA, and it’s critical that the establishment and ongoing administration of the ESOP complies with the complex rules and requirements each step of the way.
Corporate tax law. With specific rules (and advantages) depending on whether your company is an S corporation or a C corporation, and the potential for significant tax savings and deferment for both your company and yourself, it’s critical to have a knowledgeable accounting partner or other tax advisor to offer guidance.
ESOP financing. The degree of leverage your company will require to fund the ownership transfer aside, having a banking partner as your lender who knows the ins and outs of the ESOP process will enable a smoother transaction.
ESOP maintenance and administration. Establishing an ESOP is not a set-it-and-forget-it matter, so it’s important to have someone at the table who understands retirement benefit administration as well as the specifics of ESOP structuring and finance and can play an advisory role not only during the transaction but afterward as well.
Bank of America, a leading national ESOP lender, has been deeply involved in this field for over a quarter of a century. In addition to bringing vast experience to financing all forms of business succession strategies, the bank has a deep know-how in ESOPs specifically. And with hundreds of relationships with ESOP-owned companies, Bank of America has the team to work with your company both before and after a transfer of ownership. And on a personal level, given the demands of a sudden influx of liquidity, Bank of America can provide you direct access to the wealth management and estate planning expertise at Merrill and Bank of America Private Bank.
 |
Contact your Bank of America specialist to discuss any exit strategy options you might be considering. |
Ready to meet with a specialist?
Our specialists are ready with advice and guidance to help move your business forward.
Retirement planning tips for business owners
Explore your exit strategies and prepare financially for life after business.
Important Disclosures and Information
Bank of America, Merrill, their affiliates and advisors do not provide legal, tax or accounting advice. Consult your own legal and/or tax advisors before making any financial decisions. Any informational materials provided are for your discussion or review purposes only. The content on the Center for Business Empowerment (including, without limitations, third party and any Bank of America content) is provided “as is” and carries no express or implied warranties, or promise or guaranty of success. Bank of America does not warrant or guarantee the accuracy, reliability, completeness, usefulness, non-infringement of intellectual property rights, or quality of any content, regardless of who originates that content, and disclaims the same to the extent allowable by law. All third party trademarks, service marks, trade names and logos referenced in this material are the property of their respective owners. Bank of America does not deliver and is not responsible for the products, services or performance of any third party.
Not all materials on the Center for Business Empowerment will be available in Spanish.
Certain links may direct you away from Bank of America to unaffiliated sites. Bank of America has not been involved in the preparation of the content supplied at unaffiliated sites and does not guarantee or assume any responsibility for their content. When you visit these sites, you are agreeing to all of their terms of use, including their privacy and security policies.
Credit cards, credit lines and loans are subject to credit approval and creditworthiness. Some restrictions may apply.
Merrill Lynch, Pierce, Fenner & Smith Incorporated (also referred to as “MLPF&S” or “Merrill”) makes available certain investment products sponsored, managed, distributed or provided by companies that are affiliates of Bank of America Corporation (“BofA Corp.”). MLPF&S is a registered broker-dealer, registered investment adviser, Member SIPC, and a wholly owned subsidiary of BofA Corp.
Banking products are provided by Bank of America, N.A., and affiliated banks, Members FDIC, and wholly owned subsidiaries of BofA Corp.
“Bank of America” and “BofA Securities” are the marketing names used by the Global Banking and Global Markets division of Bank of America Corporation. Lending, derivatives, other commercial banking activities, and trading in certain financial instruments are performed globally by banking affiliates of Bank of America Corporation, including Bank of America, N.A., Member FDIC. Trading in securities and financial instruments, and strategic advisory, and other investment banking activities, are performed globally by investment banking affiliates of Bank of America Corporation (“Investment Banking Affiliates”), including, in the United States, BofA Securities, Inc., which is a registered broker-dealer and Member of SIPC, and, in other jurisdictions, by locally registered entities. BofA Securities, Inc. is a registered futures commission merchant with the CFTC and a member of the NFA.
Investment products: