How to Sell Your Business Tax-Free with an ESOP (2025 Guide)
What Is an ESOP?
Are you a business owner thinking about the future? Maybe you want to retire, step back, or just cash out some of your hard work. One smart way to do this is by setting up something called an ESOP.
ESOP stands for Employee Stock Ownership Plan. It’s a way to sell part (or all) of your business to your employees — but not directly. Instead, you sell to a special trust made for them. The trust holds the stock, and the employees become owners over time.
An ESOP is not just good for your team. It also comes with big tax breaks for you and your company. Let’s break it down.
How an ESOP Works
Let’s say your business earns $1 million a year before interest, taxes, and other costs — we call that EBITDA.
Now, imagine you sell 30% of your company to an ESOP. That means 30% of your business is now owned by your employees through the trust.
Here’s the cool part: If you do it the right way, you may not have to pay capital gains taxes on the sale. That’s thanks to something called Section 1042 of the tax code.
You can take the money from the sale and reinvest it in other things — like stocks or funds — and delay paying taxes. Sometimes, you can avoid those taxes altogether.
Plus, the company can use pre-tax dollars to repay the loan used to buy the stock. That means the business gets a tax deduction while paying off the ESOP loan.
If your company is an S-Corporation, the part owned by the ESOP doesn’t pay federal income tax. So, if 100% of the business is owned by the ESOP, it could mean zero federal income tax.
Why Business Owners Love ESOPs
There are many reasons owners pick ESOPs as their exit plan:
- You get cash right away, even if you don’t sell the whole business.
- You don’t have to leave right away. Many owners stay on for years after selling part of their business.
- You can keep control, especially if you sell less than 50% at first.
- You pay less (or no) capital gains tax, which saves you money.
- The company gets tax breaks for paying off the ESOP loan.
- Employees feel like owners, so they care more and stay longer.
- You can still pass wealth to family or donate to a cause later on.
What You Need to Know Before Starting
ESOPs are powerful, but they’re not for everyone. Here are some things to think about:
- Your business should be making at least $750,000 a year in EBITDA.
- Your team should be stable, with low turnover.
- You’ll need a valuation expert to figure out the right price.
- You’ll also need a third-party trustee to manage the plan.
- There are rules to follow every year, including plan checks and updates.
- It can cost $50,000 to $100,000 to set up everything.
Also, employees don’t “buy” the stock with their own money. Instead, they earn it over time as part of their work. That keeps things fair and simple.
Exit Your Business Your Way
One of the best parts about an ESOP is flexibility. You can sell your business all at once or in steps.
Here are some options:
- Sell 30% now and more later
- Sell 100% right away and stay on as CEO
- Sell slowly and add retirement or family plans into the mix
Most owners choose to stay involved during a transition period. That helps keep the business strong and gives employees time to adjust.
You can also combine an ESOP with other plans, like retirement savings, legacy gifts, or setting up a trust for your kids.
Real Benefits, Real People
Think of an ESOP as a win-win. You get rewarded for your hard work, and your team gets a chance to share in your success.
Many owners use ESOPs to:
- Retire with peace of mind
- Keep the business local
- Avoid selling to private equity
- Build a strong legacy
ESOPs also help your business stay independent. You won’t have to sell to a big corporation or an outside buyer who might change everything.
How We Help
Setting up an ESOP is not something you want to do on your own. It takes a team of experts — and that’s where we come in.
We work with:
- Top ESOP attorneys
- Business valuation firms
- Plan administrators
- Third-party trustees
We’ll guide you through the entire process. You’ll understand your options, know the costs, and make the best choice for you and your team.
From start to finish, we’ll make sure everything runs smoothly — and that you get all the tax benefits that come with it.
Is an ESOP Right for You?
If you’re thinking about selling your business, an ESOP might be the perfect fit. It gives you:
- Cash in your pocket
- A tax-friendly sale
- A proud way to say goodbye
- A chance to reward your employees
Want to find out if an ESOP is the right exit plan for you?
Just reach out. We’ll walk you through the steps and see if it’s a match for your business.
Ready to Exit Smart? Let’s Talk ESOP.
Selling your business doesn’t have to mean giving up your legacy. With an ESOP, you can exit on your terms — and reward your team in the process.
Contact us today to learn how you can exit smart, keep more of your wealth, and build a future you’re proud of.