Employee ownership versus selling to an outside buyer: What’s right for your business exit?
- Michelle Philippon
As you think about retirement or stepping back from your business, understanding your exit options is critical to protecting what you’ve built. Most owners first consider selling the business to a buyer—but what if your best option is your own employees?
Below, I compare selling to an outside buyer versus transitioning to broad-based employee ownership, a path that’s often overlooked but could be the most powerful way to secure your legacy.
Succession options: a quick primer
Selling to an outside buyer
You can sell your business to one of three main types of outside buyers:
- Strategic/synergistic buyers: Often a competitor or industry partner who wants to acquire your customers, staff, or capabilities. They acquire outside businesses to create long-term value by integrating the target business into their existing operations.
- Private equity: Investment firms that raise capital from institutional investors and high-net-worth individuals, then use private equity funds to acquire equity stakes in companies. They aim to buy and grow (or flip) businesses and later sell them at a profit, usually after three to seven years. They’re often focused on financial returns over legacy.
- Entrepreneurial/early-stage owner buyers: An individual entrepreneur or a group of people who want to buy an existing business instead of starting their own from scratch. Often, they seek more freedom and creative control than a traditional job, yet the security and legacy of a proven concept with a customer base.
Employee ownership (EO)
This option involves selling part or 100% of the business to your employees, typically through a structure like an Employee Stock Ownership Plan (ESOP), Employee Ownership Trust (EOT), or worker cooperative.
The process will usually be a leveraged buyout. EO allows you to receive fair market value, have control over your exit timeline, retain your workers, and keep your business locally rooted.
Quick comparison: EO versus outside buyer
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Consideration
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EO
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Outside buyer
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|---|---|---|
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Market value
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Typically market value
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Typically market value, but can be more (depending on the type of buyer)
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Liquidity
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Yes
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Yes
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Tax benefits
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Potential tax advantages (i.e., 1042 rollover)
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No unique tax benefits
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Process control
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Owner retains more control over timeline and terms
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Buyer typically drives process and timeline
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Legacy preservation
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Strong alignment with preserving mission, jobs, and community
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Business may be restructured, relocated, or rebranded
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Employee retention
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High retention, improved morale, and productivity
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Retention is uncertain; staff changes are common
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Key considerations for business owners
When weighing your options, consider how each path aligns with your personal and professional goals. Here’s how employee ownership compares to selling to an outside buyer:
1. Market value
With employee ownership, you can receive market value for your company—just like you would with an outside buyer. With strategic/synergistic buyers, though, you can receive more money than you do selling to your employees because they believe your business could add significant value to their operation.
However, some outside buyers—especially private equity firms—may offer less than expected because of standardized valuation methods, sophisticated negotiation tactics, and deal structuring.
2. Liquidity
If upfront cash is important to you, both options can accommodate this—though the structure may vary. In an EO sale, you may receive part of the payment at closing and the rest over time (i.e., a seller note). Outside buyers may also structure deals this way, and private equity often requires owners to retain a stake for a period after sale (i.e., a rollover equity process).
3. Tax consequences
Selling to employees can come with significant tax benefits depending on the structure (like a 1042 rollover in an ESOP sale). By contrast, selling to a private equity firm or strategic buyer typically offers no unique tax advantages.
4. Process control
An employee ownership transition gives you more control over the timeline and the process. You can choose how involved you want to be and when. With outside buyers—especially private equity—most of the deal terms and timing will be in their hands.
5. Legacy
If maintaining your business’s values, culture and community roots matters to you, EO is often the best fit. Your employees—who already understand your mission—carry it forward. Outside buyers may rebrand, relocate, or change your operations to fit their own goals.
6. Employee retention
Employee ownership is proven to boost retention, morale, and performance. Your workforce remains intact, and they’re more invested in the success of the business. In contrast, outside sales often lead to layoffs or cultural shifts that impact staff stability.
Why consider employee ownership?
Here are a few reasons to consider EO as an exit strategy instead of selling to an outside buyer:
- Receive market value for your business.
- Get flexibility around your exit timeline.
- Protect your team and mission.
- Secure your retirement and your company’s future.
- Keep your business local and community-focused.
Want to know more benefits of employee ownership? Dive into 10 reasons to go EO.
Ready to explore what’s right for you?
At Project Equity, we specialize in helping business owners like you explore employee ownership as a succession path. We can dive into your exit goals, your hopes for the future of your business, and the potential EO options available to you.
Got questions? Our team has answers. Set up a call today.
Yes. Selling to your employees—often through an employee ownership structure like an ESOP—typically allows you to receive market value for your business. While a strategic buyer may sometimes offer a higher amount, employee ownership can still provide a competitive sale price while preserving your company’s values and mission.
Selling through an employee ownership structure can offer significant tax advantages. For example, a sale to an ESOP may qualify for a 1042 rollover, which can defer capital gains taxes—something not usually available in a conventional sale to an outside buyer.
Transitioning to employee ownership helps maintain your company’s culture, values, and ties to the community. It can also boost employee morale, increase retention, and increase resilience. In contrast, selling to an outside buyer may result in major changes to operations, staffing, or company direction.
