ESOP Alternative: Step Up Legacy Plan – A Smarter Path to Employee Ownership
As a business owner approaching retirement or planning an exit, the idea of selling to your employees can be both emotionally rewarding and operationally sound. Two common paths often arise: the traditional Employee Stock Ownership Plan (ESOP) and what we offer at Allen Business Advisors, the Step Up Legacy Plan™. While both can achieve similar goals, they are drastically different in terms of cost, complexity, and impact.
In this post, we’ll compare the Step Up Legacy Plan to a traditional ESOP, outlining the pros, cons, and practical considerations to help you choose the right option for your business, your employees, and your future.
What is an ESOP?
An ESOP is a federally regulated retirement plan that allows employees to acquire shares in the business, often over time. It has many tax advantages but is also governed by strict IRS and Department of Labor regulations.
Pros of an ESOP:
- Offers significant tax advantages for both seller and employees
- Can motivate employees by giving them an ownership stake
- Provides a structured and gradual transition of ownership
- Preserves company legacy and promotes employee retention
Cons of an ESOP:
- Requires a company with at least $1.5M in EBITDA to justify costs
- Setup can cost $100,000+ with high ongoing administrative fees
- Highly regulated (ERISA, IRS, DOL oversight)
- Complex valuation and compliance requirements
- Bank financing often limited to 40-60% of purchase price
- Seller typically provides 30-70% of financing through a seller note
In short, while ESOPs offer impressive tax benefits, they are often only practical for larger companies with strong financials and the infrastructure to handle compliance.
What is the Step Up Legacy Plan™?
The Step Up Legacy Plan is a simplified, flexible approach to employee ownership. It enables trusted key employees to buy the business with as little as 10% down. The rest is financed through SBA loans and a seller note. The seller typically receives 90% of the sale price at closing.
Unlike an ESOP, the Step Up Legacy Plan is not a retirement plan and does not trigger ERISA compliance. This makes it a leaner, faster, and less expensive option.
Pros of the Step Up Legacy Plan:
- Employees can purchase with low or no money down
- SBA financing covers 70-90% of the sale price
- Seller receives most of their money upfront
- No ongoing administrative burden or regulatory oversight
- Flexible deal structure tailored to the business
- Suitable for businesses under $6M in value
- Maintains business legacy and keeps company in the community
Risks and Considerations:
- Employees must step into an ownership mindset
- Most employees will need legal and financial support
- Personal guarantees are often required
- May require conflict resolution if selling to multiple employees
The Step Up Legacy Plan avoids the red tape of an ESOP while preserving many of the same emotional and operational benefits.
Why the Step Up Legacy Plan is Often the Better Choice
For many small and mid-sized business owners, the ESOP is simply not feasible due to cost and complexity. The Step Up Legacy Plan fills that gap.
With 3.5 million businesses owned by Baby Boomers and 2 million forecasted to close in the next decade, finding accessible ways for employees to buy businesses is more important than ever. The SBA recognizes this and has made changes to its rules that now allow employees to purchase a business with no money down, as long as the seller provides a 10% loan.
This makes the Step Up Legacy Plan a powerful tool for:
- Business owners who want to retire securely
- Key employees with deep company knowledge and commitment
- Communities that rely on local businesses to thrive
Conclusion: A Simpler, More Personal Exit Strategy
Selling to your employees doesn’t have to mean entering a world of bureaucracy. The Step Up Legacy Plan offers a clear, cost-effective path to succession that honors your legacy and rewards your team.
Compared to an ESOP, it offers faster execution, fewer costs, and less red tape. And most importantly, it creates a win-win-win for owners, employees, and communities.
If you’re ready to explore whether this is the right path for you, contact Allen Business Advisors today to schedule a consultation.