Exit Without Losing Legacy

For many business owners, selling to private equity feels like the obvious exit strategy.

You build a profitable company. You reach a point where you want liquidity, diversification, or a path to retirement. Then the calls start coming in from strategic buyers, private equity groups, and advisors telling you this may be the right time to sell.

But here’s the question many founders don’t ask early enough:

What happens to your company after the sale?

Will the culture survive?
Will your employees be protected?
Will your customers experience the same level of care?
Will the mission you spent decades building continue?

In a recent episode of the Build It to Billions Podcast, Brett Swarts sat down with Robert Reavis, Director at ButcherJoseph & Co., to discuss a powerful exit planning alternative that more business owners should understand: the Employee Stock Ownership Plan, also known as an ESOP.

Robert and his team specialize in M&A, succession planning, recapitalizations, capital advisory, and ESOP transactions for founders and closely held family businesses. And according to Robert, an ESOP may allow business owners to achieve liquidity while preserving the legacy, culture, and long-term vision of the company they built.

Why Business Owners Should Think Beyond Private Equity

Private equity is not automatically bad. For some owners, it can be the right fit. A private equity buyer may bring capital, systems, operational support, and growth opportunities.

But for mission-driven founders, a private equity sale can also create tension.

Many private equity firms are focused on increasing enterprise value over a relatively short investment horizon. That may mean cost cutting, leadership changes, restructuring, or shifting the company’s original culture in pursuit of financial returns.

For an owner who cares deeply about employees, customers, community, and legacy, that can be a difficult tradeoff.

An ESOP offers another path.

Instead of selling the company to an outside buyer, the owner sells some or all of the company to a trust established for the benefit of the employees. Over time, employees can become beneficial owners of the company through the ESOP structure.

That means the founder may still receive liquidity, but the company remains independent and employee-centered.

What Is an ESOP?

An Employee Stock Ownership Plan is a qualified retirement plan that invests primarily in the stock of the sponsoring company.

In plain English, it is a way for employees to participate in the ownership of the company without having to personally buy shares out of pocket.

The company sets up an ESOP trust. The trust purchases shares from the selling owner. Employees participate in the plan based on rules such as compensation, tenure, or other qualified plan requirements.

Over time, employees build value through their ESOP accounts as the company performs and the value of the stock grows.

For the business owner, an ESOP can create a succession plan that rewards the people who helped build the company.

The Biggest Secret to a Successful ESOP

When Brett asked Robert for the number one secret to setting up a proper ESOP, Robert’s answer was simple:

Start early, be intentional, and build the right team.

Like any major exit strategy, an ESOP should not be rushed.

A successful ESOP requires thoughtful planning, careful analysis, and a team of specialized advisors. That team may include an ESOP investment banker, legal counsel, valuation experts, tax advisors, trustees, and financial planners.

The earlier an owner starts planning, the more options they usually have.

Robert emphasized that owners need to understand their objectives before choosing a structure. Are they looking for partial liquidity or a full exit? Do they want to remain involved after the transaction? Is preserving culture a top priority? Are they trying to create tax efficiency? Do they want employees to benefit from the future upside?

These questions matter because the right exit structure should serve both the owner and the company.

C Corp vs. S Corp ESOPs

One of the most important planning questions is entity structure.

Robert explained that C corporation ESOPs and S corporation ESOPs can offer different tax advantages depending on the owner’s goals.

With a C corporation ESOP, if an owner sells at least 30% of the company’s stock to an ESOP and meets certain requirements, the owner may be able to use Section 1042 of the Internal Revenue Code to defer capital gains tax.

This is often compared conceptually to a 1031 exchange in real estate.

Instead of selling real estate and exchanging into replacement real estate, a qualifying business owner may sell stock to an ESOP and reinvest the proceeds into qualified replacement property, often consisting of U.S. corporate stocks or bonds.

If structured properly, the owner may be able to defer capital gains tax and potentially hold the replacement property until death, where heirs may receive a step-up in basis as part of the estate plan.

Of course, this is highly technical and requires specialized tax and legal guidance.

With an S corporation ESOP, the seller does not receive the same Section 1042 rollover benefit. However, a 100% ESOP-owned S corporation may generally be exempt from federal income tax at the corporate level because the ESOP trust is a tax-exempt retirement plan shareholder.

That can create a powerful cash flow advantage for the business after the transaction.

The key point is this: there is no one-size-fits-all answer. The right structure depends on the owner’s goals, the company’s financials, and the long-term plan.

Why ESOPs Can Be Attractive for Founders

For founders who care about more than the highest purchase price, an ESOP can be compelling.

Here are a few reasons why:

1. Legacy Preservation

An ESOP can help keep the company independent. Instead of selling to a third party that may change the culture, leadership, or mission, the company continues forward with employees as the beneficial owners.

2. Employee Reward and Retention

Many founders feel a deep loyalty to the employees who helped them build the company. An ESOP can provide a meaningful wealth-building opportunity for those employees over time.

3. Tax Efficiency

Depending on the structure, ESOPs may offer significant tax advantages for the seller and/or the company. This can improve after-tax outcomes and preserve more capital.

4. Flexible Exit Planning

An ESOP can be structured as a partial sale or a full sale. Some owners may sell a portion of the company first and transition out over time, while others may pursue a more complete exit.

5. Cultural Continuity

For purpose-driven companies, culture is often one of the most valuable assets. ESOPs can help align employees around long-term performance while preserving the company’s identity.

ESOPs Are Not for Every Company

While ESOPs can be powerful, they are not the right fit for every business.

A company typically needs strong cash flow, a stable management team, and enough financial capacity to support the transaction. ESOPs also come with regulatory requirements, valuation considerations, fiduciary responsibilities, and ongoing administrative obligations.

That is why Robert stressed the importance of planning early and assembling the right team.

An ESOP should not be treated as a simple transaction. It is both an exit strategy and a long-term ownership structure.

The Bigger Exit Planning Lesson

The biggest takeaway from this conversation is that business owners should not wait until they are ready to sell before thinking about succession.

By then, options may be limited.

The best exits are usually built years in advance. They are designed with clarity around the owner’s goals, the company’s needs, the employees’ future, and the family’s wealth plan.

Private equity may offer a strong financial bid, but it may not always offer the best legacy outcome.

An ESOP may allow an owner to unlock liquidity, create tax efficiency, reward employees, and preserve the mission of the company.

For founders who have spent a lifetime building something meaningful, that matters.

Final Thoughts

Selling your business is one of the most important financial and emotional decisions you will ever make.

The question is not simply, “Who will pay me the most?”

The better question is:

“Which exit strategy helps me protect what I built, take care of my people, and create the greatest long-term impact?”

For some owners, the answer may be private equity. For others, it may be a strategic buyer. But for legacy-minded founders, an ESOP deserves serious consideration.

Before you sell your company, explore all of your options. Understand the tax implications. Think through your succession plan. Build the right advisory team. And make sure your exit aligns with your values, not just your valuation.

To hear the full conversation with Robert Reavis of ButcherJoseph & Co., watch the full episode here: 

If you are planning to sell a business, real estate, cryptocurrency, or another highly appreciated asset and want to explore tax-deferral strategies, the team at Capital Gains Tax Solutions can help you evaluate your options. Schedule a free consultation to learn how a Deferred Sales Trust may help you defer capital gains tax, create liquidity, diversify your wealth, and build a more flexible exit plan.