Your Guide to Employee Ownership: ESOPs, Direct Sales & EOTs

When done right, selling to your employees can give you fair value for your business while rewarding the people who helped build it. But the right approach depends on your specific situation—your company's size, your timeline, and what you want for the future.

Whether you're planning a gradual transition to preserve your company culture, need a clean exit within a few years, or want to ensure your mission-driven business maintains its values—there's an employee ownership approach that fits your goals.

Types of Employee Ownership 

If you’re exploring employee ownership—either as part of an exit plan or a strategy to improve employee engagement and motivation—there are three main choices:

1. Employee Stock Ownership Plan (ESOP)
2. Direct Sale to Employees
3. Employee Ownership Trust (EOT)

Let’s breakdown each EO structure, their characteristics, and which types of businesses they may be more suited for.

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Employee Stock Ownership Plan (ESOP) 

An ESOP is a specific type of retirement plan set up as a trust. The ESOP trust buys shares of the company from the owner and holds on behalf of the employees. Over time, the company gives shares or cash to the ESOP to increase employee ownership. Employees have individual ESOP accounts, and upon retirement, can start selling their shares back to receive cash value. A trustee—often an ESOP lawyer—oversees the ESOP and makes decisions in the best interest of the employee members.

It’s important to note that because an ESOP is a retirement plan, its structure is guided by certain government rules and regulations.

ESOPs can be a great fit for companies that:

• With $1.5+ million in annual profits (EBITDA)
• Have a large, stable employee base
• Are willing to invest a lot in employee education
• Have strong financial, legal, and administrative resources

Benefits of an ESOP:

• Potentially significant tax benefits, especially with a full (100%) sale
• Loans designed for ESOPs are easily accessible
• Helps align employee interests with company success

Potential challenges of an ESOP:

• Most expensive employee ownership option (often costing $200k+ to set up, with $50k+ in annual upkeep)
• A lot of legal limits on how they can be set up and operated
• Can be confusing for employees to understand
• Ongoing buy back of shares from retiring employees can be hard to sustain

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Direct Sale

Direct sales (sometimes called management buyouts) work best as partial exit strategies or for owners who want to reward just a handful of key employees. With this approach, specific employees buy shares directly, either upfront with financing or gradually over time. This can be done in a lot of different ways, but the most common are stock options (especially for startups) or agreements between the owner and certain employees.

Often, the owner gives their employees some free shares to start, and then as the company makes money, employees use their portion of the profits to purchase more shares. Other times, employees secure a loan to buy a larger amount of shares upfront, then use the money they make as owners to pay off the loan.

Direct sales can be a great fit for:

• Smaller, profitable companies where 1-2 employees are interested in ownership
• Owners using EO to motivate employees, not as a full exit plan
• Companies with key employees ready to take on the financial and legal details of owning shares directly

Benefits of a direct sale:

• Simple and inexpensive to set up
• Easy for employees to understand what it means for them
• Can be tailored to fit the needs of the owner and employees

Potential challenges of a direct sale:

• Becomes more costly and complicated with more employee buyers
• Key employees may need to take on significant personal financial risk
• If an employee leaves, they still own their shares, which can make it harder for the original owner to fully exit or for current owners to benefit
• With more than a few employee owners, disagreements and politics can lead to bad decisions
• Employees who buy shares may eventually face the same challenges when trying to sell

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Employee Ownership Trust (EOT)

With an EOT, a private trust is created to buy shares from the owner and hold them for the employees—similar to how a family trust works. The trust agreement, made when the owner sells their shares, lays out which employees qualify for ownership, how profits are shared, how decisions are made between the selling owner and the employee buyers, and what happens to the money if the company is sold down the line. The trust is run by a board, typically made up of 3–5 members, which may include the selling owner, key employees, and sometimes employee representatives.

When an employee leaves the company, they’re typically removed from the trust, so ownership stays with the current employees.

EOTs can be a great fit for companies:

• Of various sizes, from 10 to 10,000 employees
• Making more than $300,000 in profits (EBITDA)
• With two or more potential employee buyers
• Wanting a structured, cost-effective sale process—without the complexity

Benefits of an Employee Ownership Trust:

• 40-60% less expensive than ESOPs to set up and maintain
• Creates clean ownership transitions when employees leave
• Gives selling owner more control over exit timeline and level of involvement post transaction
• Preserves company culture and values for the future
• Works well for full exits or gradual transitions
• Reduces financial, legal, and compliance risks for both owners and employees
• Can be tailored to reward key employees differently

Potential challenges with an EOT:

• Requires more initial planning than a direct sale
• Employees may need more help to understand it
• Not ideal for very small businesses with low profits or few potential buyers
• Fewer financing options than ESOPs, usually reliant on regular bank loans

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Choosing the right employee ownership structure for your business

Ultimately, the best employee ownership model is the one that best aligns with your company’s size, profits, culture, and goals. An ESOP can work well for larger, more stable businesses, while a direct sale may make sense for smaller firms with just a few key employees interested in ownership. For the many companies in between, an EOT offers a happy medium that balances structure with flexibility.

The right employee ownership approach gives you three things most business sales can't: fair value for what you've built, certainty that your company's future is secure, and the satisfaction of rewarding the people who helped you succeed.

Want to know if an EOT makes sense for your business? Schedule a free consultation with one of our experts today. 

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