Answers, glossary terms, podcast episodes, and research reports on employee ownership — selected for Tennessee business owners.
Succession planners often recommend planning begin 5 years in advance of the anticipated exit. However, there is no hard rule for this, and a successful exit can occur within a year, sometimes less.
The optimal time to sell a business is when it is performing strongly, has a capable management team in place, and the founder is prepared to transition out - ideally with a 12-month runway to execute the sale process effectively.
Employee ownership means a company’s employees own a meaningful share of it, directly or through a trust. The main US forms are an employee stock ownership plan (ESOP), an Employee Ownership Trust (EOT) and a worker cooperative. A sale to employees is one exit path, alongside a family transfer or a sale to an outside buyer.
Most advisors and succession planners are either unaware of EO or misunderstand it. Sometimes supporting owners to pursue other exit-paths better aligns with their incentives. However this is changing and there are many ongoing efforts to raise awareness of EO.
Employee ownership comes in many varieties including equity compensation, direct share ownership, Employee Stock Ownership Plans (ESOP's) (often for larger companies), worker co-ops and Employee Ownership Trusts (EOT's) (often either works with smaller companies).
Strategic buyers are motivated by synergies and long-term strategic benefits, while financial buyers are primarily focused on the financial performance and investment returns of the target company.
Research shows that financial buyers are more likely to lay off employees post-acquisition than strategic buyers.
~ 75% of business founders who sold their company to a third party end up regretting that decision within a year, because of unrealistic expectations about the sale price or not finding the right buyer who was a good fit for the business and could take it to the next level
Most owners who try to sell never do, even with a profitable business, because outside buyers need a high return. Employee ownership offers a competitive, often more predictable exit that can keep the business open and keep jobs. It may not suit a business without healthy profits, or an owner with many interested buyers who wants the most cash now.
EO can enhance company performance, as it creates a closer tie between employee performance and rewards. Employees are effectively “working for themselves,” productivity-reducing conflict is minimized and productivity-enhancing cooperation and innovation encouraged.
A professional business valuation is a crucial document in any negotiated sale, and should be commissioned just before negotiations are likely to begin in earnest, whether with an internal (e.g., employees) or external (e.g., strategic or financial) buyer.
Employee ownership sales are typically financed by a combination of the following options: External lenders Seller financing Employee contributions (In most worker co-op EO sales the employees will put up some equity in the form of a buy-in).
Key factors: Identify and develop a qualified internal team, establishing clear career development programs, robust systems to reduce founder dependence, providing transparency and decision-making opportunities to the team, gradually transitioning responsibilities from founder
In some firms, the family retains partial ownership alongside the EO to allow for liquidity while still maintaining involvement. Evaluating factors like cash flow, existing debt, management continuity, and getting a professional valuation are all important when considering EO
ESOP's are required by regulation (ERISA) to be broad-based For worker co-ops, there is typically a probationary period before which a new hire has the opportunity to apply to become a worker-owner In an EOT, the trustee is a fiduciary agent on behalf of all employees.
Observe and document employees’ skills, leadership qualities, and daily activities to identify potential successors. Share your company vision and goals so potential successors understand the big picture and you can gauge their commitment. Draft future leadership role descriptions to clarify needed skills and guide development efforts. Seek employee feedback on career aspirations and refine your plan accordingly. Involve more team members in decision-making and create incentives (bonuses, profit-sharing, equity) to foster commitment and continuity.
EO is a flexible option with any current ownership structure, and allows selling only a portion of the company to employees over time, maintaining the business's legacy and culture while transitioning ownership gradually.
Staying with the company post-sale depends on How long you want to remain active How long you expect to continue financially benefiting how critical you are to the day-to-day operation of the business, both in terms of knowledge and/or holding key relationships.
Employee ownership creates transformative wealth for workers. Research shows ESOP participants accumulate a median of $164,000 vs. $17,000 for typical households. Women of color see 160x-1,435x wealth increases. Employee-owned businesses are 21% more likely to survive, grow 2-3% faster, and have <0.3% loan default rates. With 2.9 million businesses facing succession and only 6% of small businesses aware of EO options, expanding employee ownership represents a major opportunity for worker wealth building and community resilience.
Why EO Companies Better Building Worker Wealth
Owners Journey of Learning about Employee Ownership
Why Owners Choose EO and What it Offers
Why an owner chose Worker Cooperative over an outside buyer
Three employee ownership models for better jobs
Long time ESOP skeptic Jay Goltz attended an ESOP seminar that initially caused him anxiety, but ultimately led to clarity that an ESOP is right for his business. He believes an ESOP provides stability and helps employees retire well, without some of the risks that come with selling to an outside buyer. Jay and Shawn discuss whether employees are really "owners" in an ESOP and conclude the messaging should focus more on the benefits of stability and retirement savings. They also note that many accountants and lawyers don't fully appreciate the non-financial reasons entrepreneurs choose ESOPs.
Owners who chose a Perpetual Purpose Trust instead of ESOP
Psychology of Ownership and EO Participant Productivity
Butler Till demonstrates how a 100 percent employee owned ESOP model drives client tenure to 8.9 years compared to the 3 year industry average. By empowering staff to think like owners, the agency improved efficiency by 4600 hours and reduced turnover to 11 percent. This ownership mentality creates a relentless focus on client growth and operational innovation.
Transitioning to an Employee Owned Business
What is Demutualization?
The Case for Employee Ownership
EO and ESOP Recent Research
An ESOP might cost more than $150K to install and $50K annually. An EOT should cost $50K to install and roughly $5K annually.
A public, community-curated catalog of U.S. trust-owned businesses maintained by the Purpose Trust Ownership Network (PTON). Tracks Employee Ownership Trusts, Perpetual Purpose Trusts, Long-Term Benefit Trusts, Stewardship Trusts, and related structures across 79 entries — with company size, industry, location, and year of trust formation.
Explains Board of Directors, Management, ESOP Trustee, Plan Administrator, ESOP Committee, ESOP Communications Committee Roles
Barriers to ESOP Creation
A conversation with Zolidar co-founder Sonali Kothari on why honest, unbiased exit guidance can be meaningful. Some discussion with Loren on common questions, where to focus and how to compare every succession path (family, outside sale, key employees, private equity, ESOP, or employee ownership trust) against your own business before you're forced to decide.
Repurchase obligation forecasting is a critical practice for ESOP companies to anticipate and manage future financial liabilities tied to employee exits. Without proper forecasting, companies may face unexpected liquidity pressures that disrupt growth, delay investments, and undermine employee trust. By projecting obligations 10 to 20 years ahead, companies can prepare for large payout events, support long-term plan sustainability, and align internal stakeholders around realistic financial expectations.
The two-stage growth model values a small business by splitting its future into an initial high-growth phase (5–7 years) and a subsequent perpetual growth phase. Cash flows are discounted using a rate from the build-up method, and the terminal value uses the Gordon Growth Model.
To hire a qualified valuation expert: Credentials: Look for USPAP-compliant experts with certifications such as ASA, CVA, CBA, ABV, or AICPA accreditation. Cost: Uncertified valuations range from $2.5k–$5k, while certified valuations range from $5k–$30k. Caution: Avoid appraisers who give overly optimistic valuations to secure your business, only to lower them during the actual sale.
The Methodology: When databases like PeerComps, DealStats, and BIZCOMPS record a market comparable transaction, the financial inputs (Revenue, EBITDA, and SDE) are based on a 1-year snapshot. According to the data collection standards of Business Valuation Resources (BVR) and guidelines from the American Society of Appraisers (ASA), these inputs specifically reflect the most recent full fiscal year or the Trailing Twelve Months (TTM) prior to the sale. They do not use multi-year historical averages to baseline the deal. When pulling benchmarks from these databases, you must rely on the median or harmonic mean to prevent high outliers from distorting your data. The Verification Risks: Relying purely on this data without understanding its flaws will lead to massive valuation errors. Because market comparable transactions in the SMB space are private, there is no SEC-style regulation enforcing data accuracy. With the exception of PeerComps, which mandates SBA bank verification backed by IRS transcripts, databases rely heavily on voluntary submissions from business brokers. This lack of verification creates inconsistencies in how earnings are normalized and hides critical deal structures, making the resulting market comparable multiple dangerously misleading if taken at face value. The Calibration Strategy: Because of these data risks, valuation experts rarely rely on a market comparable valuation alone. Instead, a bottom-up intrinsic valuation method (such as a Discounted Cash Flow or Capitalization of Earnings) is expected to provide a more fundamentally sound baseline based on the company's actual cash-generating ability. The market comparable data is then used as a critical reality check to calibrate the intrinsic model, ensuring the mathematical value actually aligns with what a real-world buyer is willing to pay.
Deal Terms & Structure heavily influence a business’s selling valuation, buyer pool, and exit options. Key Terms include cash at closing, deferred payments, earn-outs, and working-capital treatment. Seller Involvement (e.g., staying on as consultant) can increase the overall valuation. Longer Payment Timelines typically yield higher valuation but carry more risk.
Yes. Here’s how various professionals can help with your business valuation: Accountants: Help recast financials, separate recurring/non-recurring items, organize data, and present financial info effectively. Business Brokers: Gather comparable sales data and adjust it for current market conditions. Appraisers/Valuation Experts: Provide independent valuations, often at higher credibility and cost ($2.5k–$5k for uncertified, $5k–$30k for certified).
Documenting your business processes is a crucial first step in succession planning. Here's a systematic approach to get started: Begin with a Self-Assessment. Start by conducting a thorough analysis of your role in the business. 2) Map Your Roles and Responsibilities. Document Key Relationships and Dependencies. 4) Create Process Maps. Test Your Documentation. 6) Consider Business Continuity. Develop Training Materials. 8) Maintain a Living Document. The goal of this documentation isn't just to create a manual – it's to ensure business continuity and make knowledge transfer possible. Start with the most critical processes and gradually expand your documentation over time. This systematic approach will help ensure that your business can operate effectively even in your absence and facilitate smoother leadership transitions when needed.
Improve business transferability by: Creating a formal succession plan with clear successors, transition milestones, and training/contingency scenarios. Documenting all processes and key information to reduce owner-dependency. Maintaining clean, compliant financials for smoother due diligence and lower transaction risk. Ultimately, these measures reduce risks, making the business more easily transferable.
A county is a primary administrative and political subdivision of a state, serving as an intermediate level of local government between the state and smaller units such as municipalities. Counties typically provide regional services including law enforcement, courts, public records, and road maintenance across both incorporated and unincorporated areas. While a municipality (such as a city, town, or village) is a self-governing local entity usually contained within a county's boundaries, the two serve different governmental functions—municipalities handle urban services for their residents, whereas counties address broader regional needs. In some cases, a city and county may consolidate into a single jurisdiction, as seen in San Francisco or Denver, but more commonly they operate as distinct layers of government with overlapping geographic territory.
Improve your DSCR by boosting profitability (raising revenue or cutting costs), reducing debt, managing cash flow effectively, and enhancing operating performance. This increases your business’s appeal to buyers and lenders, facilitating a smoother exit.
The Double Lehman formula is a stepped success-fee schedule that M&A advisors use as a starting point on mid-market deals. It comes from the original Lehman formula (5-4-3-2-1) that Lehman Brothers used in the 1960s and 1970s. The name is not one scale. The common Double Lehman doubles those rates to 10-8-6-4-2. Mid-market shops also use a 10-9-8-7-6 schedule that then steps to 5% and 4%. On that mid-market schedule, a $5 million deal is a blended 8% ($400,000) and a $20 million deal is a blended 5.25% ($1.05 million). The engagement letter sets the fee.
Companies can manage repurchase obligations strategically by forecasting early and often, designing flexible plan features, using a mix of funding methods, and clearly communicating financial realities to employees.
Common Trust provides a roadmap for building an advisory team to execute an Employee Ownership Trust transition. The guide emphasizes that while existing CPAs and corporate counsel can often stay involved, specialized expertise in purpose trusts and EOT-specific advisory is critical for long-term success. It details the roles of legal, tax, valuation, and financing partners, highlighting how an employee ownership advisor serves as the central coordinator to ensure structural alignment.
A strong DSCR (Debt Service Coverage Ratio) enhances a business’s valuation, improves financing options, and reassures potential buyers that the company can comfortably handle its debt obligations and cash flow needs.
Lenders finance employee-ownership buyouts mainly with debt the company repays from its future profits. That usually means a senior loan, sometimes topped up with subordinated (junior) debt to reach the seller's price. Because a broad group of employees cannot personally guarantee a loan, loan guarantees and specialized lenders (including SBA 7(a) lenders and mission-aligned community lenders) often make the difference. What a company can borrow is set by its cash flow, not by any single employee's credit.
A trade association, or industry association, is an organization founded and funded by businesses within a specific sector to promote collective interests, establish best practices, and represent the industry to policymakers.
In the US there's no EOT-specific cap or floor on the sale price. Unlike an ESOP, where the Department of Labor under ERISA bars the trustee from paying more than appraised fair market value, a US Employee Ownership Trust runs under ordinary state trust law, so the seller and company set the price far more freely. The real limits are standard IRS fair-market-value rules and what the business can repay. Discounting, even partial gifting, is allowed.
Beyond private investors, public and nonprofit programs help fund and support employee-ownership transitions. A program can offer grants, tax incentives, loan guarantees, or technical assistance rather than a straight investment. Some are created by law, with defined eligibility rules and an annual budget; others are run by mission-driven nonprofits. Programs rarely cover a whole buyout, but they lower the cost and risk of getting one done.
Broad-based employee ownership in private US companies, whether for a gradual buyout or a single transaction, is mainly created through trust-based solutions. Usually, this means an employee stock ownership plan (ESOP), with employee ownership trusts as a low-cost alternative that lacks the ESOP’s detailed rules but also lacks its tax incentives. Some companies, however, prefer direct employee ownership, where employees personally acquire and own company shares. That generally means a gradual buyout and is especially suitable for certain industries, particularly professional services such as engineering, architecture, and wealth management, and it can work well in other sectors where employees have the necessary risk tolerance and disposable income or the company provides significant contributions.
All three are forms of broad-based employee ownership, but they differ in cost, complexity, and mechanics. An EOT holds the company in trust for employees, who do not buy their own shares; it tends to have lower setup costs and more flexibility than an ESOP, but it does not offer the selling owner the capital-gains tax deferral an ESOP or worker cooperative can. An ESOP is a regulated retirement-benefit plan with higher setup and compliance costs. A worker cooperative is directly member-owned and governed one-member-one-vote.
Beyond a seller note and a senior bank loan, US Employee Ownership Trust buyouts are usually filled in with mission-aligned capital: community loan funds and impact lenders, dedicated employee-ownership funds, and junior layers like mezzanine (subordinated) debt and non-voting preferred equity. Because most EOT loans are repaid from future profits and no single employee can reasonably sign a personal guarantee, government loan-guarantee programs can also help. This is general education, not legal, tax, or investment advice.
Setting up an Employee Ownership Trust typically costs $50,000 to $80,000 one time, covering legal drafting of the trust and related documents plus deal structuring. Ongoing maintenance runs about $10,000 to $20,000 a year, paid to the trustee. These are planning ranges, not quotes, and vary with the company and the deal.
An Employee Ownership Trust is usually governed in three layers: a trustee who holds the company in trust and owes a fiduciary duty to the employee beneficiaries, the company's board of directors that runs the business, and a trust stewardship committee (often including employees) that represents employee interests and safeguards the company's mission. The exact roles and how they interact are set in the trust documents.
Both happen, but seller financing is common in Employee Ownership Trust transitions: the trust buys the company over time out of future profits, with the owner paid through a note instead of a single up-front check. External financing (bank debt or mission-aligned lenders) can supplement or replace it to give the owner more cash at closing. The right mix depends on the company's cash flow, how much liquidity the owner needs up front, and what financing is available.
An Employee Ownership Trust is taxed differently from an ESOP. It does not give the selling owner the Section 1042 capital-gains deferral that selling to an ESOP or worker cooperative can, so the owner is generally taxed on the gain in the normal way. The company can deduct the profit-sharing it distributes, and employees are taxed on it as ordinary income, like a bonus. Confirm with a CPA or tax attorney.
Yes, an Employee Ownership Trust trustee has a fiduciary duty to act in the best interests of the employee beneficiaries. Trustees can be independent professionals, an institutional (corporate) trustee, or, in some structures, individuals connected to the company; the choice and selection process are set in the trust documents. Many companies use a professional or institutional trustee for independence and expertise, which is part of the ongoing annual cost.
There are three main ways to value a business: income, market and asset. Income values expected cash flow, market compares similar sales, and asset nets what it owns against what it owes. Zolidar’s Aha Planner gives owners an indicative valuation from their own financials.
Employee Ownership Trusts work for companies of essentially any size and industry. The practical floor is having enough employees (roughly 10 or more) and enough net income to comfortably cover the trustee's annual cost (on the order of $15,000 a year). Beyond that, fit is driven by the owner's goals more than the company's profile.
Entrepreneurship through acquisition (ETA) means becoming an owner-operator by buying an existing business instead of starting one. The buyer, often called a searcher, finds a company to buy and run. The best-known models are the traditional search fund and the self-funded search.
A company held in an Employee Ownership Trust can generally still be sold if circumstances require it, but the structure is designed to make a casual sale hard, and that permanence is much of the point. Any sale must clear the conditions set in the trust documents and satisfy the trustee's fiduciary duty to the employee beneficiaries. Those conditions vary by trust, so settle the specifics in the trust design with counsel.
In a US Employee Ownership Trust, the trust, not individual employees, is the company's legal shareholder, so employees usually do not hold personal voting rights to elect the board. Their voice is built into the trust instrument instead, typically through a stewardship committee, the board, and a trust enforcer, often with the right to nominate or elect who fills those seats. It is built this way for the asset lock: holding shares in trust for a fixed purpose keeps the company employee-owned and resistant to sale, which freely votable, sellable individual shares would undermine.
A US Employee Ownership Trust (EOT) is one of the strongest tools for protecting a company's mission long term, though "permanently" overstates it. Because shares sit in a trust rather than with individuals who can be bought out, the trust agreement can lock in the mission, restrict any future sale, and appoint roles whose legal job is to enforce that purpose. How durable that lock really is depends on the state chosen, careful drafting, and people honoring their roles. This is general education, not legal advice.
Profit-sharing is a built-in feature of an Employee Ownership Trust, balanced against the company's need to reinvest. That balance is a governance decision: the board manages the business and its capital needs, while the trust structure and any stewardship committee keep employee interests in view. The trust documents and the company's financial discipline, not a fixed formula, set how much profit is paid out versus retained for growth.
No. Forming an Employee Ownership Trust does not, by itself, require becoming a C corporation. A trust can hold S-corp or C-corp stock or an LLC interest, so many companies keep their existing entity. The C-corp question really traces to ESOPs and Section 1042, whose capital-gains deferral is not available for a straight sale to an EOT. Whether your own entity should change is a facts-and-circumstances call for a CPA or attorney.
In a US Employee Ownership Trust, the trust agreement decides who fills each role, so specifics vary by company and no law dictates them. A common pattern: employees elect a stewardship committee, that committee appoints the company board, and the board selects a "directed" trustee that only handles administration. Employees can get a real say, mainly through the committee and any board seats, but how much is a design choice written into the agreement, not a legal default. This is general education, not legal or tax advice; confirm any structure with a qualified attorney and a CPA.
Yes. An Employee Ownership Trust can hold part of the company while the founder or other owners keep the rest, and you can move toward fuller employee ownership over time. Important: the trust's ownership percentage is not the same as who benefits. Selling 30% into the trust does not mean only 30% of employees participate. Who qualifies is set by the trust's terms, not by the size of the stake.
Setting up a US Employee Ownership Trust is a small-team effort. The core roster: an attorney experienced in trusts and business transitions to draft the documents, a trustee to hold shares for employees, a CPA or tax advisor engaged early (structuring drives the tax outcome), and an independent valuation firm to set a fair price. Many owners also add an employee-ownership advisor up front to assess fit and coordinate everyone. This is general education, not legal or tax advice.
DSCR is a financial metric that lenders use to assess a borrower's ability to repay their debt obligations . It measures a company’s available cash flow to pay current debt obligations . A higher DSCR generally indicates that a company is more capable of handling its debt payments.
A traditional search fund is capital one or two people raise from investors to find, buy, and run a private company, usually for six to ten years. A self-funded search is separate: the searcher pays the search costs and typically keeps a larger share of a smaller company.
There are three distinct strategies to meet ESOP repurchase obligations, each with unique effects on share allocation, corporate cash flow, and ESOP ownership.
Workforce mix rarely rules a US Employee Ownership Trust in or out. An EOT is not a retirement plan and is generally not governed by ERISA, so the coverage and nondiscrimination tests that shape who participates in an ESOP usually do not apply; the trust document can define a broad beneficiary group spanning full-time and part-time staff. Extending benefits to contractors is possible but a deliberate design choice with tax and worker-classification consequences. Unionized companies can use an EOT too, where the main task is fitting profit-sharing alongside an existing collective bargaining agreement.
In the US, an Employee Ownership Trust does not make a company tax-exempt or carry a special tax break. The company keeps paying the same federal and state income tax it would under any owner, depending on whether it is a C corporation or a pass-through. The recurring mechanic to know: profit-sharing to employees runs through payroll as deductible compensation, lowering taxable income and taxed to employees as ordinary income, like a bonus. This is general education, not tax advice.
Employee Ownership Trusts are growing because they are simpler, more flexible, and lower-cost to set up than ESOPs, while still putting ownership in employees' hands. They appeal to owners who want to preserve a company's mission, jobs, and independence, especially as a large wave of small-business owners reaches retirement without a clear successor. The numbers are still small, on the order of ten new transitions a year, but rising.
It can, depending on the loan. Under the Community Reinvestment Act (CRA), a business loan of $1 million or less generally counts as small business lending. A larger loan to a small business can count as community development if it keeps or creates jobs for low- or moderate-income people or areas.
BizBuySell industry valuation multiples put the average cash flow (earnings) multiple at 2.58 and the average revenue multiple at 0.67 for sales from Q3 2021 through Q2 2026. Sixteen sectors and 115 industry rows each list a revenue multiple, an SDE earnings multiple, and a median sale price. The median sale price in the set is $340,000.
When selling your business, it is important to seek out a CPA with experience in M&A transactions, ideally someone who has been involved in at least 5-6 transactions in the past 3 years. They should have more than 10 years of experience, with a deep understanding of multi-state implications and international compliance, if needed. Also, they should primarily work with businesses, and depending on the size of the sale, should be able to provide quality of earnings studies, tax and accounting due diligence, among other services. A good CPA should be able to discuss pros and cons of stock vs asset sale and identify potential issues.
You can form an Employee Ownership Trust in any US state. Oregon and Delaware are commonly recommended because their trust laws support perpetual (indefinite) trusts and the flexibility to amend them. The trust can be sited in a different state from where the business operates, so a company in a state that restricts perpetual trusts can still form its trust elsewhere.
The size of an ESOP repurchase obligation is driven by a combination of plan design, workforce demographics, share value, and distribution policies.
When selling your business, careful tax planning is essential to help lower the costs of the acquisition and minimize taxes for you as the seller. It's critical to understand the difference between short-term and long-term capital gains. Short-term capital gains, which come from assets held for a year or less, are taxed at your regular income tax rate. Long-term capital gains, from assets held for over a year, are taxed at a lower rate, but also include a 3.8% Net Investment Income tax. The structure of the sale—whether it's an asset sale or a stock sale—also has significant tax implications that will affect how much you take home from the deal.
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