The ESOP effect on US mid-market deals

May 2026  |  FEATURE | MERGERS & ACQUISITIONS

Financier Worldwide Magazine

May 2026 Issue

Employee stock ownership plans (ESOPs) are increasingly being used as strategic acquisition tools, with transaction volumes having doubled over the past decade. Their growth is driven by significant tax advantages for S corporation sellers and stronger employee retention. These structures are evolving from niche strategies into mainstream mechanisms that allow ESOP‑owned companies to use tax‑advantaged cash flow for acquisitions while offering unique capital gain deferrals to sellers.

The strategic value of employee ownership

As the employee benefits landscape continues to evolve, a growing number of organisations have come to recognise the value of ESOPs in supporting long‑term growth and resilience. Various studies indicate that ESOP‑owned businesses tend to outperform their peers and experience lower staff turnover. Recent data from the Aspen Institute, for example, suggests that employee ownership strategies, when combined with a supportive organisational culture, can reduce voluntary turnover from 13 percent per year to about 2 percent. To sustain this performance, ESOP strategies must be developed alongside strong financial literacy initiatives, effective communication and active stakeholder management.

There is increasing recognition of ESOPs as a means of aligning employee incentives with corporate performance. Granting employees a direct ownership stake encourages behaviours associated with productivity, cost discipline, innovation and customer service. One of the most significant benefits is improved engagement and retention, as ownership fosters a heightened sense of accountability and loyalty, helping to preserve institutional knowledge. Over time, this continuity can strengthen operational stability and support sustainable expansion.

According to Eqvista, employees in ESOP‑owned companies accumulate substantially more wealth. The 10.7 million active ESOP participants collectively hold assets totalling approximately $2.09 trillion. The average account balance for an active participant is around $164,946, rising to more than $315,000 for employees aged 55 or over or those with more than 10 years of service. Young adults with ESOPs have a 92 percent higher median household net worth and 33 percent more income than peers without ESOPs, and these differences compound over time.

How ESOPs are reshaping mid-market dealmaking

The strong performance of ESOP‑owned companies is influencing dealmaking behaviour across industries. These companies tend to outperform non‑ESOP peers and therefore can bring an additional source of capital strength to transactions.

As a result, many ESOP‑owned companies are acquiring targets at an increasing rate, particularly in the mid‑market. According to the National Center for Employee Ownership, the number of businesses acquired by ESOPs has roughly doubled in recent years.

Across the US middle market, ESOP‑driven M&A activity is concentrated in sectors where ownership transition, tax efficiency and cultural continuity are especially valuable. In the cannabis sector, for instance, socially conscious operators are increasingly exploring ESOP structures both as a mechanism for wealth sharing and as a financial strategy. Because cannabis remains classified as a Schedule I controlled substance under federal law, many operators face punitive effective tax rates under section 280E of the Internal Revenue Code. By converting to a fully ESOP‑owned S corporation, qualifying companies can significantly reduce or eliminate federal income tax at the corporate level, thereby improving cash flow and strengthening their strategic position in M&A.

Construction remains one of the most established ESOP sectors. Often stable, profitable and family-owned, construction firms frequently struggle to identify third‑party buyers that understand the operational complexities of their businesses. ESOP transactions allow owners to exit gradually while preserving management continuity, retaining operational expertise and maintaining longstanding client and subcontractor relationships.

Architecture and engineering firms are similarly well suited to employee ownership, as they depend heavily on professional talent, client trust and long term project pipelines. ESOP structures allow principals to secure liquidity at fair market value without being acquired by external consolidators, ensuring the preservation of firm independence and cultural identity. At the same time, employee ownership enhances retention and engagement in highly competitive labour markets, which can support long term enterprise value.

Private equity (PE) is also becoming increasingly active in the ESOP ecosystem. PE sponsors are using ESOPs as tax‑efficient exit routes for portfolio companies, while the expanding secondary market enables investment in mature ESOP‑owned businesses seeking growth capital. These trends position ESOPs not only as succession tools but also as drivers of strategic M&A activity. Although historically overlooked by PE and family offices, ESOPs offer a distinctive route to achieving liquidity and strengthening operational performance.

The road ahead for ESOP-driven growth

A variety of factors are currently influencing dealmaking and will continue to shape activity through the second half of 2026 and beyond, including favourable economic conditions for M&A and supportive legislative developments. It is also important to recognise the growing body of evidence that employee‑owned businesses often outperform their peers.

Ultimately, ESOPs are broadening the range of viable exit strategies and reshaping how value is created and sustained. Once viewed primarily as niche succession tools, employee ownership structures are increasingly influencing deal design, tax planning and long‑term governance. For founders seeking liquidity without compromising legacy, and for investors focused on durable performance rather than short‑term arbitrage, ESOPs present a compelling alternative.

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Richard Summerfield