Employee Stock Ownership Plans are drawing more attention in the middle-market M&A landscape as business owners look for exit options beyond strategic buyers, private equity and management buyouts. A July 14, 2026 Forbes analysis by Mary Josephs framed ESOPs as a more visible force in dealmaking, both as acquirers and as companies being pursued by outside buyers.
The article cited a broad M&A rebound and said global deal activity reached $2.8 trillion in the first half of 2026. It also pointed to increased ESOP acquisition activity and renewed private equity and strategic interest in employee-owned companies. Those claims are best treated as market-framing figures from the Forbes analysis unless independently verified through deal databases, but the larger trend is supported by broader employee-ownership data: ESOPs remain a significant ownership structure, with the National Center for Employee Ownership estimating 6,609 ESOP plans, 6,411 unique ESOP companies and more than 15 million participants in the most recent data available.
For small and mid-market owners facing succession questions, the attraction is straightforward. An ESOP can create an internal buyer when a third-party sale is unavailable, preserve company continuity and give employees a direct financial stake in the business after the founder exits.
Retiring owners are creating deal supply that traditional buyers cannot fully absorb
The lower middle market is facing a succession problem that conventional M&A cannot fully solve. Many privately held companies are owned by baby boomer founders who built durable businesses over decades but do not have children, managers or outside buyers ready to take over on acceptable terms.
That mismatch is particularly visible among smaller firms that are profitable but not large enough to attract a deep auction process. A strategic acquirer may want a platform company with scale. A private equity sponsor may need a minimum earnings threshold. A management team may understand the business but lack the capital or risk appetite to buy it.
An ESOP can fill part of that gap by allowing a qualified retirement plan to buy some or all of the owner’s shares. For owners who want liquidity without selling to a competitor or dismantling the culture they built, that structure can be more attractive than waiting for a buyer who may never arrive.
The tax treatment can also matter. Section 1042 of the Internal Revenue Code allows certain sellers of qualified securities to defer capital gains if the stock is sold to an ESOP or eligible worker-owned cooperative, the plan owns at least 30% of the company immediately after the sale and the seller reinvests in qualified replacement property. Historically, the clearest version of that deferral applied to closely held C corporations. A SECURE 2.0 change scheduled for sales after December 31, 2027, expands limited treatment to S corporation stock, but only for a portion of the sale amount.
ESOP deals produce different economics than private equity or strategic sales
An ESOP is a qualified retirement plan under federal retirement law. In a leveraged ESOP transaction, the plan can borrow money to buy shares from the selling owner, and the company then makes tax-deductible contributions to the plan so the debt can be repaid over time.
That structure creates a different set of financial outcomes from a traditional sale. A strategic buyer may offer a higher headline price but can bring integration risk, job cuts or loss of independence. A private equity buyer may provide liquidity but often expects faster growth, leverage and a future exit. A management buyout can preserve culture but depends on the managers’ ability to finance the deal.
An ESOP transaction is not automatically simpler or better. The company needs sufficient cash flow to service acquisition debt, fund retirement-plan obligations and handle future repurchase obligations when employees retire or leave. A trustee must also determine that the ESOP is paying no more than fair market value, which makes valuation and fiduciary oversight central to the process.
Research on employee ownership generally points to stronger worker wealth outcomes, retention benefits and resilience for well-run employee-owned companies. The NCEO’s current data shows ESOPs holding more than $2 trillion in plan assets and paying more than $166 billion in benefits to participants in 2023.
Those figures support the case that ESOPs can be meaningful wealth-building tools. They do not prove that every new ESOP transaction will outperform a private sale or produce better operating results. Performance depends on company quality, debt load, valuation discipline, management capability and whether employees are meaningfully involved after the transaction closes.
Research drawing on management-practice data has generally found that employee ownership works best when the ownership stake is paired with real employee involvement, transparent communication and professional management systems. Treating the ESOP only as a tax-advantaged financing tool can limit the operational upside that employee ownership is supposed to create.
Current data does not fully show ESOP adoption at the small-business level
The biggest analytical gap is not whether ESOPs exist at scale. They do. The gap is how much of the recent interest is concentrated in smaller companies, which sectors are driving it and how newly formed ESOPs perform by transaction vintage.
The NCEO reports that 309 new ESOPs were identified in 2023 and that an average of 269 new ESOPs have been created each year since 2019. That updates older formation figures and is a better current benchmark than pre-2021 averages. But even comprehensive Form 5500-based ESOP data arrives with a lag, because retirement plan filings are processed and cleaned well after the plan year ends.
That lag makes it difficult to confirm in real time whether ESOP activity in 2026 reflects a durable structural shift, a response to high M&A valuations or simply greater attention from advisors and market commentators. It also makes it hard to measure how ESOP outcomes differ between companies with 50 employees and companies with hundreds or thousands.
The awareness and consideration figures cited in the Forbes analysis should therefore be treated as directional unless the survey methodology, sample design and response rate are available. Interest in ESOPs is not the same as completed transactions, and the conversion rate from consideration to closing is likely much lower than the top-line awareness numbers suggest.
Owners considering an ESOP should test feasibility before choosing an exit path
- Start with cash-flow capacity. The company must be able to service ESOP acquisition debt while continuing to invest in operations and meet retirement-plan obligations.
- Model tax treatment by entity type. C corporation sellers may be able to use Section 1042 if the statutory conditions are met. S corporation sellers face different rules, with limited expansion scheduled after 2027.
- Get an independent valuation early. A trustee must protect plan participants and ensure the ESOP does not overpay. Owners should understand likely fair market value before comparing an ESOP to outside offers.
- Assess management depth. An ESOP is not a substitute for succession planning. The company still needs leadership capable of running the business after the founder steps back.
- Budget for advisors and ongoing governance. ESOPs require specialized legal, valuation, trustee and administrative support. Those costs should be modeled against the benefits of continuity and potential tax advantages.
- Communicate ownership culture clearly. Employees need to understand how the ESOP works, what it does and does not guarantee, and how their decisions affect long-term company value.
NCEO data, DOL filings and deal flow will show whether ESOP momentum lasts
The key indicators to watch are annual NCEO formation estimates, Department of Labor Form 5500 filings, SBA lending activity tied to ESOP transactions, BizBuySell time-on-market data for small-business sellers and private-equity acquisitions of employee-owned companies. Together, those sources will show whether ESOPs are becoming a broader succession solution or whether the current attention is concentrated in a smaller set of advisor-led transactions.
The evidence supporting ESOPs as a meaningful exit mechanism is stronger than it was a decade ago. But the structure remains highly fact-specific. For some owners, an ESOP can preserve culture, reward employees and create a viable buyer. For others, the complexity, debt burden or governance requirements may make a strategic sale, management buyout or gradual internal transition the better path.
Â
