Should You Sell to a Roll-Up or an ESOP?

Industry roll-ups have been an integral part of American commerce since the days of Standard Oil and U.S. Steel. Today, they remain a useful growth vehicle, helping businesses like yours grow exponentially by consolidating fragmented industries and providing shared resources. While there are many success stories, there are also cautionary tales, like overleverage and unrealized synergies, that make business owners wary of selling to roll-ups and lead them to explore alternatives.

One strong alternative is to sell to your employees through an Employee Stock Ownership Plan (ESOP). Depending on your goals, this option may provide a better outcome than joining a roll-up.

Your Goals When Selling a Business

When you’re preparing to sell your business, you likely focus on a few critical objectives:

• Maximizing the value of the sale
• Minimizing taxes on the proceeds
• Ensuring continuity for your business

These goals help you realize the highest net proceeds and provide a future for both your company and your employees. But they often compete with one another, requiring careful trade-offs. Several key factors will determine how well each option aligns with your goals.

How to Maximize Proceeds in a Business Sale

Maximizing value in a sale is driven by multiple factors, but most importantly, what the buyer pays and how much of that you keep after taxes.

One of the main advantages of selling to a roll-up is the buyer’s ability to extract synergies, typically through headcount reductions, facility consolidation, or streamlining shared services. That means the buyer can take every dollar of profit you generate and potentially turn it into more than a dollar in post-deal earnings.

As a result, they may be able to pay more for your company than a buyer who doesn’t benefit from these efficiencies. How much of that added value you capture in the purchase price is up for negotiation. But when structured properly, selling into a roll-up could be an effective way to boost headline value.

An ESOP, on the other hand, is governed by a trustee whose fiduciary responsibility is to pay no more than Fair Market Value for your company’s shares. There’s no synergistic premium to be shared. While this may mean a lower purchase price, the after-tax proceeds you receive from an ESOP could tell a different story.

ESOP Tax Advantages vs. Roll-Up Sales

Proceeds from an ESOP sale are generally taxed at capital gains rates, typically between 20% and 30%, depending on your state. In contrast, proceeds from a roll-up sale may be taxed at capital gains rates, or, if structured as an asset sale, at ordinary income tax rates, which can go as high as 37%.

A properly structured ESOP transaction offers a compelling advantage: capital gains tax deferral under IRC Section 1042. If you qualify and elect this treatment, you can defer taxes altogether. Learn more about 1042 tax deferrals.

Here’s how the math compares:

Net Proceeds Example

Now, suppose the roll-up buyer offers a 20% premium. Even then, the ESOP can still be competitive:

Even with a 20% higher purchase price, the tax efficiency of the ESOP puts it in the lead.

And if you choose not to elect 1042 deferral, an ESOP still often results in higher net proceeds than a roll-up asset sale. That’s why, if net proceeds are your top priority, an ESOP sale will likely be competitive, if not superior, to many roll-up transactions.

Liquidity & Exit Timing: Roll-Up vs. ESOP

This is where roll-ups have the advantage. If your exit horizon is short, say, within the next three years, you’re more likely to receive more cash up front from a roll-up buyer. Even if part of your consideration is in equity, many consolidators structure deals to deliver faster liquidity.

In contrast, ESOP transactions are often financed through bank loans and seller notes. While this structure may maximize total proceeds over time, it can mean less cash at closing. If you're looking for immediate liquidity, that's an important consideration.

Employee Impact: Roll-Up vs. ESOP

As advisors focused on the lower middle-market, we’ve found that many of the owners we work with care deeply about what happens to their company and employees after a sale.

That’s where roll-ups and ESOPs really diverge.

Many of the savings in roll-ups come from eliminating overlapping roles, particularly in support functions like HR and accounting, and often at the executive level. These services are typically absorbed by the parent company. Depending on your buyer, this can also mean relocating operations or folding your business into another entity entirely.

By contrast, in an ESOP transaction, the business usually stays intact. Your team remains in place. Your employees now become owners. Your company stays local and independent, with its culture preserved. For owners who value continuity and legacy, this can be a powerful motivator. Learn more about the distinct advantages of an ESOP.

Choosing Between a Roll-Up or an ESOP

No single structure fits every owner. Both roll-ups and ESOPs offer compelling advantages, depending on your specific objectives.

If you’re ready to become part of a larger organization, relinquish control, and receive your proceeds more quickly, a roll-up might be the right fit.

If your focus is on maximizing net proceeds, preserving jobs, rewarding employees, and maintaining company culture, an ESOP could be a better solution.

At PCE, we specialize in helping business owners like you navigate complex decisions like this one. Whether you’re looking for top-line value or long-term impact, we’ll help you evaluate your options with clarity and confidence, so you can choose what’s best for your future and your business.

Will Stewart

Will Stewart is a Managing Director at PCE and leads the firm’s ESOP practice. A recognized expert in the ESOP community, he has advised on over $3 billion in transactions and helps business owners evaluate and structure successful employee ownership strategies.

Read Will's Full Bio