If you’ve built a company worth somewhere between five and twelve million dollars, I’d bet most of your net worth is sitting inside it. Not in a brokerage account, not in real estate, in the business itself.
That’s the same concentration problem I talk about constantly with real estate investors, just wearing a different suit. I tell people not to dump everything into one property or one market. Business owners have the same exposure, just bigger and harder to see, because the asset is something they built with their own hands and can’t easily picture selling.
I had a CPA named Steve Nicokiris on the podcast recently. We met through Vistage, the CEO peer-advisory group, and he’s spent years helping business owners think through exit options most of them have never heard of. One stat he opened with stuck with me: over 80% of business owners have the bulk of their wealth tied up in their company, not in outside investments. If that company hits a rough stretch, a lot of that net worth can disappear fast.
So the question becomes: how do you take some chips off the table without either giving your company away or getting hammered on taxes when you do?
The three ways out
Steve laid out three basic paths when a business owner wants liquidity. There’s the traditional sale, an M&A transaction to a strategic buyer or private equity. There’s a leveraged dividend, where the company borrows money and pays some of it out to the owner, which works but doesn’t do much for you on the tax side. And there’s the one most owners have never seriously considered: selling to an ESOP, an employee stock ownership plan.
An ESOP isn’t your employees personally buying stock. A trust buys the shares, and your employees own a stake in that trust based on their pay. It’s an ERISA-governed retirement plan, similar in spirit to a 401(k), except it’s invested in the stock of the company they work for.
Here’s what makes it worth a serious look: it comes with a tax benefit that doesn’t exist anywhere else in the tax code for a business sale.
The part that works like a 1031 exchange
If you’ve ever done a 1031 exchange on a rental property, you already understand the shape of this. You sell one asset, roll the proceeds into another qualifying asset, and defer the tax instead of paying it on the spot.
Section 1042 of the tax code does something similar for a business owner selling to an ESOP. Sell at least 30% of your C-corporation’s stock to an ESOP, and take the proceeds and reinvest them, within a window that opens three months before the sale and closes twelve months after, into qualifying stocks and bonds of other U.S. operating companies, and you can defer the capital gains tax on that sale entirely. Structure it so you hold that replacement property until you pass away, and your estate gets a step-up in basis. That tax may never get paid at all.
A few things worth being precise about, because this isn’t identical to a 1031. If your business is currently an S-corp or an LLC, you’ll need to convert to a C-corp to use Section 1042 (that conversion itself doesn’t cost you anything, and the federal corporate rate is a flat 21%). And the replacement property has to be securities of domestic operating companies, stock, preferred stock, corporate bonds, not real estate or a REIT directly. Some owners then borrow against that replacement portfolio to fund other investments, which is a separate move with its own considerations, not the 1042 election itself.
Still, the core idea is the same one real estate investors already understand instinctively: don’t take a tax hit you don’t have to take when there’s a legitimate way to defer or eliminate it.
What this actually looks like in dollars
Steve walked through an example that made this concrete. Say your company is worth somewhere around six or seven million dollars, and you sell 49% of it to an ESOP for roughly $3.5 million. You finance part of that through a bank line and part through a seller note that the company’s own cash flow pays down over a few years.
Because the company is now making a tax-deductible contribution to fund that ESOP purchase, a business earning a million dollars a year could see its taxable income wiped out for two or three years straight while that note gets repaid. On $3 million of income sheltered at a 45% combined tax bracket, that’s over a million dollars of tax that simply doesn’t get paid, on top of whatever you deferred on the sale itself under Section 1042. Compare that to a straight sale to private equity, where you’re paying 20-25% capital gains tax on the way out with no equivalent shelter.
It doesn’t matter what you sell your company for. What matters is what lands in your pocket. Sell for less through an ESOP but keep it all, and you can come out ahead of a higher headline number from a PE buyer who leaves you with 75 or 80 cents on the dollar after tax.
The part that doesn’t show up in the numbers
An ESOP also solves a problem a lot of owners don’t say out loud: they don’t actually want to sell their company to a stranger. Private equity buyers routinely want the owner gone, want to install their own management, and often aren’t interested in keeping a founder’s kids in the business if that’s part of the plan. Steve told me about a client in the women’s formalwear business, profitable, doing 10-15% margins every year, who went to the private equity market and got offered three or four times earnings. They didn’t like the industry and didn’t think it was interesting. He said no, went the ESOP route instead, and an independent valuation based on the business’s actual cash flow came in at $6.7 million, a number he considered fair. His kids stayed in the business. He kept some ownership and some upside. Nobody outside the company had to buy in.
That flexibility runs both directions. You don’t have to sell 100%. Sell 30 or 40%, take some liquidity, and keep running the company with the remaining stake, or come back and sell more of it in a few years once you’ve built out a management team that doesn’t need you in the room every day.
The estate planning bonus almost nobody talks about
Once you put debt on the balance sheet to fund an ESOP purchase, the company’s valuation drops the day after the transaction, sometimes substantially, because a professional valuation has to account for that new leverage. If you’ve been putting off gifting shares to your kids because the number felt too big to make a meaningful dent with your exemption, a lower post-ESOP valuation can be the opening you needed.
The federal gift and estate tax exemption sits at $15 million per person in 2026, and that higher amount is now permanent rather than scheduled to sunset. A business owner who never got around to estate planning while the company was worth $30 or $40 million can find that the same company, valued at half that the day after an ESOP transaction closes, suddenly fits inside an exemption that didn’t come close to covering it before.
Where this doesn’t make sense
I want to be straight about this because Steve was straight about it with me. If you want to walk away with every dollar today and never think about the business again, an ESOP isn’t for you, because it pays fair market value based on cash flow, not the premium a strategic buyer might pay to fold you into their existing operation. If your balance sheet is already leveraged to the hilt, you won’t have room to finance the transaction. And if you’re not willing to stay involved for a few years while a seller note gets paid down, this isn’t the right fit either. Realistically, you need at least a million dollars of EBITDA and enough payroll, generally a handful of employees earning real salaries, to make the funding math work at all.
Where it tends to shine is in businesses private equity doesn’t get excited about even when the numbers are solid: professional services firms like engineering, architecture, accounting and law practices, staffing companies, construction firms, and other cash-flowing but “unsexy” businesses that don’t fit a PE playbook.
The same lesson, different asset
None of this is a recommendation about what to do with your specific business or your specific portfolio. I’m not a CPA or an ESOP attorney, and neither is anyone on my team, this is exactly the kind of decision that needs a real conversation with people like Steve who do this for a living.
But the underlying lesson is one I’ve been repeating in real estate for years: don’t let your wealth sit concentrated in a single illiquid asset longer than it needs to, and don’t pay tax you don’t have to pay when the code gives you a legitimate way around it. If you’ve built a business worth five to twelve million dollars, this is worth a real conversation before you ever talk to a buyer.
If you want to be around other people who’ve gone through an exit and are figuring out where that capital goes next, come join our community inside the club.