ESOP 2026 Outlook TL;DR: Valuation, Financing, and Regulation Signals
With geopolitical events, tariff headlines, volatile equity markets, and shifting interest rates, 2025 produced no shortage of financial noise. For ESOP companies and business owners evaluating a sale, that noise can obscure what actually matters: how much your company is worth, how an ESOP transaction would be financed, and how regulatory changes may affect new and existing ESOPs.
This article cuts through the noise. We focus on the developments in 2025 that impact ESOPs, and what they signal for 2026, across three areas that drive real-world results: valuation, capital availability, and regulation.
We’ve prepared a financial market “cheat sheet,” which highlights equity market valuations and costs of capital as of 12/31/24 and 12/31/25 to provide an indication of how valuation inputs will impact year-end ESOP valuations (performed for ESOP administrative purposes).
Headline domestic equity benchmarks had volatile, but strong, performance in 2025. Middle-market valuation signals were more muted. Given the minimal change in the middle market, ESOP valuations will be linked primarily to company-level performance rather than market factors.
One of the benefits of being an ESOP company is your valuation (typically) occurs once per year. While the S&P 500 finished up 18.1% in 2025, it was a rollercoaster year with the S&P bottoming out on April 8 with a 15.3% loss (post-Liberation Day tariffs) and rebounding throughout the rest of the year. The S&P 500 is a market cap weighted index that is heavily influenced by the largest companies. The S&P 600 is more applicable for middle market companies. The S&P 600 followed a similar trend to the S&P 500; however, it was not buoyed by the strong performance of tech/AI firms. The S&P 600 closed the year up a modest 4.2%.
Pricing multiples for middle market firms have not expanded with the large cap firms. EBITDA/Enterprise Value (“EV”) multiples for the S&P 600 finished at 11.6x, which is consistent with multiples in December 2023. Valuation multiples for S&P 500 firms have expanded since 2022, increasing from 12.5x in December 2022 to 18.7x in December 2025.
Introduced in 1994, the S&P 600 is a market-capitalization-weighted index of small-cap stocks managed by S&P Dow Jones Indices. Unlike its more widely covered peer, the Russell 2000® Index, the S&P 600 covers a relatively narrow group of stocks (600 to 602) and has additional inclusion requirements.
To be included in the S&P 600, companies must have a market cap between $1.2 billion and $8 billion, maintain a 10% public float, and have positive earnings in their most recent quarter and the past four consecutive quarters combined. They also must meet certain liquidity requirements, including having 250,000 shares or more traded in each of the past six months.
The sector composition of the S&P 600 changes over time, but the index has historically carried a higher percentage of financial, industrial, and consumer discretionary stocks and a lower percentage of information technology stocks than the S&P 500.
M&A and IPO activity increased in 2025. Despite headline domestic M&A activity reaching its highest level since 2022, activity in the middle market was down. As we observed through last year, the uncertainty introduced by tariffs and the government shutdown sidelined M&A participants. Anecdotally, we have experienced an increase in activity beginning in the second half of 2025 as political uncertainty has become the “new normal,” valuations have held/increased, and interest rates are expected to decrease.
What does this mean for ESOPs? Middle market ESOPs should temper valuation expectations given the lower growth in the S&P 600 relative to headline growth in the S&P 500. Valuation growth will be contingent on company performance rather than market pricing improvements.
Middle-market leverage and debt pricing trends remained stable, while modest movement in reference rates has lowered borrowing costs.
The total leverage (total debt to EBITDA) in middle market private equity (“PE”) platform transactions decreased slightly when comparing 2024 to the first three quarters of 2025 (3.3x vs 3.2x, respectively). The senior leverage ratio decreased from 2.6x in 2024 to 2.3x in the first three quarters of 2025. Senior debt pricing for platform deals was lower in the first half of 2025 (averaging 8.1%) but rebounded to 8.6% in the third quarter of 2025. All-in subordinated debt pricing averaged 15.4%, which is consistent with 2024 pricing.
Additionally, SOFR, the typical reference rate for floating interest rate loans, finished the year 89 basis points lower than it finished in 2024. This will provide some relief for floating interest rate borrowers.
What does this mean for ESOPs? Debt markets influence the amount and cost of capital for ESOP transactions and funding corporate initiatives. This market is largely unchanged, which is a positive for prospective borrowers.
Inflation expectations are an important aspect of forecasting and valuation. Two of the prominent inflation indicators are providing different readings, with the University of Michigan’s November 2025 Consumer Sentiment Index providing a 4.5% inflation expectation over the next 12 months, up from 2.6% in November 2024; and the implied inflation from the spread on Treasuries and TIPS (Treasury Inflation Protected Securities) ranging from 2.25% to 2.40% over the 5 to 20 year maturities provided (see Cheat Sheet). Year-over-year, the TIPS spread decreased marginally (from 5 to 12 basis points) across the yield curve.
What does this mean for ESOPs? Valuation is based on long-term performance expectations. Long-term inflation expectations are relatively consistent year-over-year (as evidenced by the TIPS spread), and levels are about 50 basis points higher than when inflation spiked during the Covid pandemic. In the short term, we will see whether consumers or markets are more accurate.
New capital sources and policy proposals are expanding funding pathways for ESOP transactions, improving liquidity for selling shareholders and competitiveness versus other exit alternatives.
There has been steady growth in alternative investors either dedicated to or open to investing in ESOP companies. These firms focus on unitranche or mezzanine debt or structured equity. For instance, Apis & Heritage has led the way with the ELBO (“employee led buyout”), which provides a full buyout via an ESOP for selling shareholders.
For smaller companies, the SBA 7(a) program has become an attractive financing alternative. Historically, SBA loans were not conducive to ESOP transactions, due to a 10% equity investment, personal guarantees, and the requirement of a separate valuation. In 2023, the SBA removed the equity investment requirement and clarified that personal guarantees are not required for majority ESOP stock purchases. The SBA also issued procedural guidance that an independent business valuation is not required for ESOP loans. These changes have paved the way for SBA-financed ESOP transactions.
The American Ownership Resilience Act was introduced in both houses of Congress in May 2025. AORA is a bipartisan proposal to expand capital for ESOP transactions by providing federal loan guarantees to specialized investment funds. These “Ownership Investment Companies” would pair private capital with low-cost, government-backed debt to finance majority ESOP buyouts and growth, reducing or eliminating risky seller financing. By using credit enhancement rather than taxpayer spending, AORA aims to attract institutional investors, keep the program deficit-neutral, and make ESOPs competitive with private equity and strategic buyers.
If these three initiatives continue to gain traction, there will be greater liquidity for selling shareholders in ESOP transactions, making ESOPs a more competitive alternative to an M&A exit.
In 2025, the ESOP industry made efforts to distinguish ESOPs from employee ownership models championed by private equity groups.
In recent years, two organizations headed by Pete Stavros with links to employee ownership have garnered national attention. While the publicity on employee ownership has been welcome, there is concern in the ESOP community regarding the conflation of the employee ownership model utilized by private equity firms (and presumably championed by Expanding ESOPs). Specifically, the ESOP Association issued a special edition of The ESOP Report in November 2025 to differentiate ESOPs and the “Short-term Equity Plans” (“STEPs”) utilized by PE firms. Frankly, the ESOP Association is concerned that PE firms will abuse employee ownership to the detriment of true ESOP companies.
Forthcoming valuation guidance from the Department of Labor (“DOL”) is a central regulatory variable for 2026, shaping fiduciary risk considerations tied to adequate consideration in ESOP transactions.
The ESOP community anticipates the DOL will release regulations on ESOP valuations in 2026. ESOP professionals have clamored for regulatory guidance as the ESOP industry has operated under the proposed regulation on adequate consideration from 1986. The new regulations were required by the SECURE 2.0 Act of 2022. On January 16, 2025, the DOL issued proposed rules on valuation. These rules were withdrawn by the new administration on January 20, 2025, and were never published in the Federal Register. The new leadership of the DOL has pledged to be more friendly to ESOPs.
The new leadership of the DOL has pledged to be more friendly to ESOPs. In fact, on January 15, 2026, the DOL updated its national enforcement projects for 2026—ESOPs were not on the list, for the first time since 2005.
We expect strong activity for new ESOPs in 2026. Last year was a reset, with high expectations at the outset dashed by political uncertainty (e.g., tariffs). Valuations rebounded during the year, and business owners are becoming more comfortable with the current political environment. The positive regulatory news and financing options will make ESOPs more attractive.
For existing ESOPs, stable valuations and declining borrowing costs could make 2026 one of the more attractive environments in years to think proactively about capital allocation and balance sheet strategy.
Looking ahead, the regulatory environment will play a larger role. The forthcoming DOL rules on adequate consideration will shape how ESOP transactions are valued.
Ultimately, 2026 is shaping up to be a year of opportunity for ESOPs. Whether you are an owner exploring a sale, or a company already operating as an ESOP, the combination of stable middle-market valuations, improving capital availability, and evolving policy support makes this an important time to evaluate strategy. Companies that take a thoughtful, forward-looking approach to ownership, financing, and governance will be best positioned to deliver lasting value—to shareholders, employees, and the business itself.
Q: Why does the S&P 600 matter for many ESOP valuations?
A: The S&P 600 is presented as more representative of middle-market companies than large-cap indices. Its more modest 2025 performance and stable multiples support the view that ESOP valuation growth depends more on company performance than broad market expansion.
Q: What do 2025 debt market conditions imply for ESOP financing in 2026?
A: Leverage levels and debt pricing were largely consistent year-over-year, indicating a relatively steady financing backdrop. Lower year-end SOFR also provides some relief for floating-rate borrowers.
Q: What ESOP financing alternatives are expanding capital availability?
A: Alternative investors focused on unitranche, mezzanine, or structured equity have grown, and SBA 7(a) rule changes have improved feasibility for certain ESOP transactions. A proposed federal loan guarantee framework is also described as a potential way to expand capital and reduce reliance on seller financing.
Q: What is changing in ESOP regulation for adequate consideration in 2026?
A: The Department of Labor is expected to release valuation-related regulations in 2026, a long-anticipated development given reliance on proposed guidance dating back decades. Prior proposed rules issued in January 2025 were withdrawn shortly after and not published, leaving 2026 as the focal point for updated guidance.
Kyle Wishing
Kyle Wishing is a Director at PCE and part of the firm’s ESOP Group. With over a decade of experience in valuation and ESOP advisory, he helps business owners and fiduciaries structure transactions that support long-term growth and succession goals.