Keeping Family Businesses in the Family with ESOPs

Updated: 9/2025

Selling to an Employee Stock Ownership Plan (ESOP) is a powerful and flexible strategy for family-owned businesses navigating succession. It allows families to retain company values, offer liquidity to inactive members, and preserve legacy, all while gaining significant tax advantages.

PCE Insight: In our experience, family businesses that use ESOPs report stronger cultural continuity and better succession alignment than those that transition to private equity or third-party buyers.

Why Family Businesses Struggle with Succession

Family-owned businesses are the foundation of the private sector, making up over 60% of privately held U.S. companies (Family Enterprise USA); yet, most don’t survive into the third generation.

Only 40% of family businesses make it to the second generation, 12% to the third, and just 3% survive into the fourth (Silvercrest Asset Management Group).

Reasons include:

• Conflicting goals among family members
• Lack of clear succession planning
• Pressure to sell to outsiders

PCE Insight: In our experience, a significant number of business owners are unprepared for the family dynamics that can complicate ownership transitions.

For owners facing these challenges, Employee Stock Ownership Plans (ESOPs) offer a rarely understood but highly effective solution.

ESOPs as a Succession Planning Tool

What Is an ESOP?

An Employee Stock Ownership Plan (ESOP) is a qualified retirement plan that invests primarily in the stock of the employer. It allows employees to become beneficial owners without controlling the business.

Why It Works for Family Businesses

An ESOP allows business owners to sell shares to a trust that benefits employees, while maintaining company control and offering substantial tax advantages.

For family businesses, this unlocks meaningful options:

• Active family members can continue to lead the company
• Inactive members can receive liquidity or income
• Gifting strategies can preserve ownership across generations
• The company’s culture and name remain intact

How ESOPs meet key family shareholder goals

PCE Insight: Many of our family-business clients discover they don’t have to choose between keeping the business or keeping the family together — an ESOP can do both.

Example: A second-generation owner can sell 30% of the company to an ESOP for liquidity while gifting shares to children still active in the business.

Keeping the “Family” in the Business

Including Employees in Ownership

As family companies grow, they often rely on non-family employees in key roles. These employees become part of the firm’s cultural DNA, even if they don’t share a last name.

Selling to an ESOP allows these long-serving team members to share in the success they helped create, without requiring the founding family to give up control.

ESOPs often expand the meaning of “family,” creating ownership opportunities for those who helped build the business.

At PCE, we've seen this foster a deepened culture of accountability, pride, and stewardship, a powerful legacy for any founder to leave behind.

How ESOPs Work in Practice

For family-owned businesses navigating succession, ESOPs offer:

Flexibility in Ownership

• Sell a minority or 100% stake
• Retain control through the board and leadership
• Structure the deal in phases over time

For a deeper look at how ESOPs can balance liquidity and legacy, see our post: ESOP Is the Answer — What Was the Question? 

Long-Term Stability

• ESOP trusts have no forced exit timelines
• Employees become beneficial owners — not decision-makers
• The company stays private and independent

Sustaining employee ownership long-term requires planning. Our guide on ESOP sustainability outlines how to keep it working into the next generation.

Powerful Tax Advantages

• Sellers may defer capital gains taxes (under IRC Section 1042)
• S corp ESOPs can operate federal-income-tax-free
• ESOP valuations support gifting strategies and estate planning

Curious about the tax impact? Here's how ESOP tax incentives benefit both selling shareholders and the business.

To understand the process in more detail, see: How an ESOP Works

When an ESOP Is the Right Fit

An ESOP is worth exploring if your family business:

• Has diverging goals among family members
• Wants to reward long-term employees without ceding control
• Is seeking liquidity without a third-party sale
• Values preserving legacy and culture

Not every company is the right fit, but many are. Explore our guide, Is an ESOP Right for You?, to see how your business stacks up.

Quick Facts

• Only ~12% of family businesses make it to the third generation
• ESOPs are used by ~7,000 U.S. companies, employing over 10 million people (NCEO)
• ESOP-owned S corporations can operate with zero federal income tax

FAQs

1. Do I have to sell 100% of my business to an ESOP?
   No. You can sell a minority or majority stake depending on your goals. Learn how partial sales provide flexibility in our post: Selling a Piece of Your Company to an ESOP.
2. Will employees run the company?
   No. Employees are beneficial owners via the ESOP trust, but the board and management retain operational control.
3. How does an ESOP compare to selling to private equity?
   ESOPs allow cultural and operational continuity, while private equity typically pushes for rapid growth or exit strategies.
4. Is an ESOP a tax-advantaged option?
   Yes. ESOPs offer potential tax deferral, deductions, and tax-free earnings under the right structure.
5. Can inactive family shareholders get liquidity through an ESOP?
   Yes. The ESOP can purchase shares, providing income or exit options to non-operating family members.

Need Guidance on a Family Ownership Transition?

Selling all or a portion of the family-owned business to the employees through an ESOP is often a natural and comfortable transition, and it allows the culture of the company to remain intact while giving the family ultimate flexibility to meet the needs of all family members.

At PCE, we’ve guided hundreds of family businesses through successful ESOP transitions — preserving culture, delivering liquidity, and strengthening legacy.

 

Will Stewart, Shareholder

Investment Banking | ESOP

wstewart@pcecompanies.com

Orlando Office

407-621-2100 (main)

407-621-2124 (direct)

407-621-2199 (fax)