Why ESOP Transactions Are Booming in 2025: Key Benefits, Industry Trends & Best Practices

At a glance

• The number of business acquisitions by ESOP-owned companies roughly doubled in recent years, reflecting the unique employee and tax benefits for the ESOP buyer.
• Certain industries – such as cannabis, construction, and architecture/engineering –are particularly well-positioned to benefit from ESOP transactions that reward their workforces and offer unique tax-related solutions to sector-specific challenges.
• Both the selling shareholders and the trustee (the buyer) in a potential ESOP transaction must consider both the ramifications and the structure, as these deals have unique requirements and may not be ideal for all shareholders or companies.

Whether business owners are looking to support their employees better, successfully sell either a partial or 100% interest in their companies in an unparalleled tax-friendly structure, or transition into retirement, one method is proving increasingly popular: selling to an employee stock ownership plan (ESOP). These tax-advantaged qualified defined contribution retirement plans are designed to purchase equity from selling shareholders and transfer it to a trust for the benefit of the company’s employees.

Due to the success of many ESOP-owned companies, many of these companies are acquiring target companies at an increasing rate. The data suggests that the number of businesses acquired by ESOPs roughly doubled in recent years.

This isn’t a coincidence. ESOPs foster stability and a highly motivated workforce due to their strong economic incentives for employee performance and retention — perhaps explaining why they generally outperform companies that do not own ESOPs. ESOPs also offer legacy preserving exit strategies and unparalleled tax advantages for business owners, which are powerful factors in today’s turbulent M&A environment. For some industries, these benefits are driving even more explosive ESOP growth.

Here’s why (and where) ESOP transactions are on the rise, and what business leaders need to get the most out of a given deal.

The Growing Appeal of ESOP Transactions in 2025

In addition to the substantial employee and workforce benefits, ESOP-owned companies benefit from economic and tax advantages that continue to drive associated M&A activity. This is particularly true of 100% ESOP-owned S corporations, which are not subject to federal income taxes, as well as taxes in the vast majority of states. The simple reason is that if 100% of the company is owned by an ESOP, as a tax-exempt retirement plan, the ESOP pays no tax on the corporate flow-through income. In addition, a selling shareholder may also defer or potentially eliminate capital gains tax on the sale of a C corporation to an ESOP. There is current legislation that will expand a similar (not exact) benefit to shareholders that own S corporations.

Beyond the fundamentals, several current market trends are also fueling recent ESOP activity:

• High interest rates: With rates elevated, sellers transacting with an ESOP are increasingly financing transactions themselves using seller notes and warrants. This financing structure should allow sellers to enjoy an enhanced return on investment due to the issuance of warrants (an option that provides upside potential upon exercising in future years) in combination with the seller notes, providing a total rate of return on such debt that approximates market rates of return for other unsecured, subordinated debt instruments.
• The Silver Tsunami: A staggering 5 million businesses could change ownership by 2033 as baby boomers retire. Selling (or transitioning) to an ESOP provides an attractive exit option for owners looking to maintain their business’s legacy.
• Government support: Lawmakers on both sides of the aisle are looking for ways to increase employee ownership. The SECURE Act 2.0 and WORK Act contain provisions that promote the growth of ESOPs. From a state perspective, Colorado is leading the way through passing new tax incentives for ESOPs and establishing both an Employee Ownership Office and Employee Ownership Commission in 2019. Other states are likely to follow suit.

Industry Hotspots: Cannabis, Construction, Private Equity  

While the popularity of ESOPs spans industries, some are especially well situated to benefit from the employee ownership structure and, consequently, potential ESOP-related M&A in today’s marketplace.

Cannabis

Socially conscious cannabis companies that want to give back to their communities and employees after decades of marijuana-related incarcerations are increasingly turning to ESOPs to spread the wealth.

As an attractive benefit to selling to an ESOP for cannabis company shareholders, structuring the business in this way also provides a financial lifeline to this nascent industry. Since cannabis remains a Schedule 1 substance at the federal level, the IRS takes the position that these businesses cannot deduct certain business expenses, leading to crippling effective tax rates exceeding 50%. Properly structured as a 100% ESOP-owned S corporation, these companies can eliminate nearly all of their federal and state income taxes, significantly reducing their tax burden and improving their overall business outlook.

Construction

As stable, profitable and family-owned businesses that often struggle to find conventional buyers, construction companies have long been a natural fit for ESOP transactions. After all, their internal management teams generally have the technical know-how and industry-specific experience needed to successfully run these companies, which can make transitioning (or selling) to an ESOP a wise choice for owners looking to exit the business.

Architecture and Engineering

ESOPs offer architecture and engineering firm owners a flexible and tax-advantaged exit strategy that preserves firm independence and legacy while rewarding employees with ownership. By selling shares to an ESOP, principals can achieve liquidity at fair market value without resorting to outside buyers or disruptive mergers, ensuring leadership continuity and client stability. Employee ownership through an ESOP also strengthens engagement and retention, making it an attractive succession option uniquely suited to the culture and values of architecture and engineering firms.

Private Equity

Private equity firms also see the appeal of ESOPs. Besides offering a compelling, tax-advantaged exit strategy for their portfolio companies — which in turn can facilitate deal flow and fund new investment opportunities — a growing secondaries market is enabling PE firms to invest in successful ESOPs seeking new capital and diversification more readily.

ESOP M&A: Best Practices

Companies and prospective selling shareholders seeking to optimize the cultural and financial benefits of ESOPs should prioritize suitability and structure. Ideal ESOP candidates:

• Are profitable businesses with at least $1.5 million in earnings before interest, taxes, depreciation, and amortization;
• Have a sufficient level of employee population and payroll;
• Are not highly leveraged; and
• Have a strong management team willing to step up and run the business after the transition to an ESOP-owned ownership structure.

It is also critical for dealmakers to pay attention to the unique requirements of ESOP transactions. ESOP trustees are fiduciaries to the company’s employees and, therefore, are obligated to ensure the terms of the deal are within the realm of fair market value (i.e., the purchase price cannot exceed the upper end of a range of fair market value), which reduces the likelihood of over-leveraging the company.

Ultimately, education is the first step. Understanding the mechanics, benefits, and compliance requirements involved with buying or selling an ESOP is essential, as is partnering with experienced advisors who can steer the process and deliver long-term value for all stakeholders.

The ESOP Advantage

ESOPs can offer meaningful cultural and financial benefits, including employee ownership and potential tax advantages, while preserving legacy. However, they are nuanced transactions and can be customized based on the facts and objectives of each selling shareholder and company. Engage experienced ESOP professionals, including an ESOP financial advisor and ESOP or ERISA counsel, early to confirm suitability and to structure the deal correctly.