If you’re a business owner exploring exit strategies, the idea of selling your business to your employees might seem like the perfect way to preserve your legacy and reward those who helped you build it. While ESOPs (Employee Stock Ownership Plans) are often seen as the gold standard, they aren’t always a fit—especially for small to midsize businesses. Fortunately, there are ESOP alternatives that can offer flexibility, simplicity, and impact.
Drawing on insights from Matthew Erskine’s Forbes article and Project Equity’s 2024 Employee Ownership Guide, this post explores the top 5 alternatives to traditional ESOPs, with a detailed comparison and a spotlight on our proprietary Step Up Legacy Plan™.
1. The Step Up Legacy Plan™ (Allen Business Advisors)
Designed specifically for small business owners, the Step-Up Legacy Plan enables key employees to acquire the business with as little as 10% down. Using a blend of SBA financing and seller participation, this model provides the seller with up to 90% of the sale price at closing, all without the regulatory and cost burdens of a traditional ESOP.
Pros:
- Low to no money down for employees
- Seller receives most proceeds at closing
- SBA financing available
- No ERISA/IRS regulatory requirements
- Simple, fast, and cost-effective
Best For:
- Businesses valued under $6M
- Owners who prioritize legacy and simplicity
- Communities where business continuity matters
2. Installment Sale
A long-time favorite for owner-to-employee transitions, installment sales involve the buyer paying over time, often through a promissory note secured by the company’s assets or shares. The business’s cash flow is typically used to fund the payments.
Pros:
- Simpler to execute than ESOPs
- No need for outside financing
- Flexible terms between buyer and seller
Cons:
- Seller risks non-payment
- Slower payout over several years
- Retirement funds may be at risk
- Issue of control – you own most of the business and may have little to no control over it.
Best For:
- Owners with strong trust in their successor(s)
- Businesses with predictable cash flow
3. Management Buyout (MBO)
An MBO occurs when your senior leadership team buys out your ownership, typically using outside financing. The model is well-suited for businesses with stable cash flows and experienced internal management.
Pros:
- Keeps the company “in the family”
- Motivated, capable buyers already in place
Cons:
- Typically for businesses with a value over $6,000,000
- Requires access to capital or investor support
- May exclude rank-and-file employees
Best For:
- Businesses with strong leadership teams
- Sellers looking for quicker exits
4. Employee Ownership Trust (EOT)
An EOT (also known as a Perpetual Purpose Trust) holds the business for the benefit of employees and the company mission. Employees don’t buy shares; instead, profits are shared, and governance can be democratized.
Pros:
- No money required from employees
- Profits shared fairly and equitably
- Can preserve long-term mission and culture
- Lower cost than ESOPs
Cons:
- Limited liquidity for the seller
- Complex trust setup and legal considerations
Best For:
- Mission-driven companies
- Founders who value long-term impact over immediate payout
5. Worker Cooperative
A democratic form of employee ownership where workers buy in (usually at a modest cost) and participate in governance. Profits are distributed based on hours worked or other agreed formulas.
Pros:
- High employee engagement and retention
- Equitable distribution of profits
- Lower setup costs than ESOPs
Cons:
- Requires cultural alignment and training
- Limited outside financing options
Best For:
- Values-based companies with strong workplace culture
- Small to midsize businesses with broad employee interest in ownership
| Model | Setup Cost | Complexity | Seller Liquidity | Best For |
| ESOP | High | High | Low-Med | Large firms ($1.5M+ EBITDA) |
Step Up Legacy Plan | Low | Low | High | Up to EBITDA of $1.5M |
Installment Sale | Low | Medium | Low-Med | Owners with trusted employees |
Management Buyout | Medium | Medium | High | Strong leadership teams |
EOT (Purpose Trust) | Medium | Medium | Low | Mission-driven businesses |
| Worker Cooperative | Low | Medium | Medium | Values-driven, smaller firms |
Conclusion: The Right Exit Strategy for You
Choosing how to exit your business isn’t just a financial decision—it’s a legacy decision. While ESOPs have their place, especially for larger companies, most small business owners will benefit from exploring alternatives that are less complex, more personal, and tailored to their unique goals.
At Allen Business Advisors, we specialize in helping owners like you sell to trusted employees through the Step-Up Legacy Plan™. It’s the ESOP alternative that puts your values, your team, and your financial future first.
Learn more at: https://www.allenbusinessadvisors.com/the-step-up-legacy-plan