Retiring business owners that sell their companies to their employees can have their cake, and eat it too.
Owners that are considering an exit to a private-equity buyer might do well to compare any offer to the net proceeds they would receive from the sale of their company to their own employees. Transitions to employee ownership can come with attractive tax and financing advantages, as well as the intrinsic satisfaction of keeping their business whole, local and in the hands of the workers who helped build it.
“Provided the seller’s business meets certain criterias, employee ownership will win on its own merits because of all the benefits it can offer to that selling owner,” says Ashish Agrawal of Zolidar, a Palo Alto-based startup with an exit-planning tool to let small business owners make just such a comparison.
Tax and financing advantages embedded in employee stock ownership plans, or ESOPs, can allow sellers to defer capital gains taxes. The ability to finance deals with pre-tax company dollars can boost their net proceeds beyond what private equity or other buyers offer.
Those advantages could help distinguish Zolidar as well. The surge of retiring baby boomer business owners has been accompanied by a spate of startups seeking to guide them through their business exits. Chicago-based Rowan raised $3.3 million in a seed round last week. Succession AI, based in Toronto, builds exit planning agents for owners looking to retire. Clearly Acquired’s marketplace includes an AI-powered analyst to help sellers plan their exit.
Few include employee-ownership planning tools or comparisons. Zolidar is raising a $5 million seed round to expand employee ownership as a pathway for business succession and help workers compete against private equity and strategic buyers. Despite the benefits, employee buyouts remain underused, in part because many advisors lack the tools and expertise to guide owners through the process.
“We’re in this domain because we want to 100x the number of the employee-owned businesses. We want to make it five times larger than the M&A market that exists today,” Agrawal told ImpactAlpha. “We have a very ambitious vision but with a lot of conviction about that.”
Agrawal and co-founder Sonali Kothari, former Google colleagues, aim to make its exit-planning toolkit accessible to every stakeholder in the exit planning process, from lawyers, accountants and other advisors to management teams and frontline employees. Employee ownership deals, especially ESOPs, are nuanced transactions that carry a high risk of failure if not carefully structured.
“We talked to a lot of advisors who have been doing business consulting, and for many of them, every client is an exit planning client or a succession planning client,” says Kothari.
Many of those advisors say they lack the tools to offer clients every exit option, including employee ownership, she adds. “For those advisors, we’re creating a path for them to be able to help many more owners with our tools.”
Aha planner
As more retiring owners sell their businesses, the majority of acquisitions have flowed to private equity firms and strategic buyers. A growing number of funds are raising capital to finance employee buyouts (see, “Employee ownership funds seek to give private equity investors a run for their money as businesses change hands”).
With its exit planning tools, Zolidar aims to build up the pipeline and make more businesses aware of the advantages that selling to employees can bring.
Zolidar’s AI and data-powered toolkit includes a “Day Zero Guide” to help owners benchmark employee-led buyouts against private equity and strategic exits. Its “Aha Planner” offers financial feasibility assessments (like valuation tools) should owners decide to transition ownership to their employees. Zolid AI, an interactive exit planning guide, helps owners evaluate their exit options, with a focus on worker-led buyouts.
“We’ve built so many more tools for regular sales of businesses that we’re behind on making it easier for employee ownership to happen,” says Brian Boland of the Delta Fund, an impact fund that invests in employee ownership. Boland is one of the earliest backers of Zolidar alongside his former Facebook colleague David Fischer and Anthropic’s Matt Bell.
“If you think about the ownership economy and the employee ownership sector right now, one of the big things missing is the set of tools that make it easier for all the parties involved to complete these transactions,” Boland told ImpactAlpha. “So many of our CPAs and advisors who work with these businesses don’t know the mechanics of these types of transactions, and we need to change that.”
Investors like Boland say that when sellers are presented with the full range of exit options, many will choose employee ownership because of the opportunity to reward loyal workers and benefit from tax-advantaged sales. In many exits to employee stock ownership plans, or ESOPs, sellers can achieve net proceeds competitive with a traditional sale because of capital gains tax incentives. They may also be able to sell gradually, retain a stake and capture future upside alongside worker-owners, unlike private equity or strategic sales.
“Employee ownership has been a well-kept secret for fifty years not because it doesn’t work, but because the infrastructure to make it accessible never existed. Now it does,” Boland says.
Net proceeds
Even some advisors might be surprised to learn that when a business owner sells to their employees, rather than to private equity or strategic buyers, that it can be in their best financial interest.
In transactions where a business owner sells at least 30% of their company to an employee stock ownership plan, or ESOP, they can defer paying capital gains taxes, indefinitely even, if they reinvest the proceeds in qualified assets. More broadly, ESOP transactions are financed with pre-tax company dollars, which can enhance deal value and after-tax proceeds.
“The net proceeds to a seller could actually be much higher in a tax-advantaged sale to an ESOP,” says Michael McGinley, a former advisor who has launched Monarch Investment Partners to finance ESOP transitions, addressing another key barrier to scaling employee ownership.
“A lot of the universe, particularly investment bankers that have never done ESOPs, don’t understand that,” he added. “They also don’t get paid on net proceeds. They get paid on gross proceeds, so they’re not incentivized to maximize how much you keep.”
Monarch is focused on bridging the gap between capital markets and employee ownership, in part by positioning ESOPs as a compelling, profitable opportunity for M&A advisors and smaller business brokers.
“We’ve been working with a lot of investment banks on ideas where perhaps they get paid based on the highest offer they get from the market if they still sell to an ESOP, so it’s good for them and the seller realizes the benefit of employee ownership and the tax advantages,” McGinley said.
He hopes that such a win-win scenario might start to incentivize both sellers and their advisors to lean more toward employee ownership as an exit strategy. “They can get proceeds at closing commensurate with third-party offers and actually net more because of the tax savings,” said McGinley. “And do some good for their employees and their communities at the same time.”
In tax-advantaged transactions where an owner sells their entire business to an ESOP (called S-Corp ESOPs), that tax-exempt designation often translates into better cash flow and stronger valuations and repayment terms, providing a faster exit for the seller and more durable gains to worker-owners.
Monarch is seeking up to $250 million for its inaugural fund to provide up to 100% of a seller’s financing to facilitate up to 10 employee-led ESOP buyouts. The fund aims to provide up to 18% in gross returns for investors.
“We’re not trying to be greedy with it, but we’re not trying to be below-market,” McGinley said. “We think that’s the appropriate amount of return for the risk. If we can demonstrate that, more capital providers will follow suit because there’s trillions of dollars of businesses that need to transition in the next 10 years.”
Monarch is among a growing cohort of private credit firms that are raising capital to finance a seller’s exit when they sell their entire business to an ESOP.
Apis & Heritage Capital Partners is eyeing a $350 million hard cap this year for its second employee-led buyout, which aims to finance 100% ESOP deals and create at least 3,000 business worker-owners over five years. Liquidus Partners, led by “recovering venture capitalist” Brendan Richardson and impact investor Geoff Woolley, is looking to raise a $300 million fund to acquire seller notes from ESOP transactions.
EO evangelism
On Zolidar’s website, subscription rates for advisors range from $3,000 to $8,000 annually for access to business valuation and other exit planning services, while valuation services for business owners start at $500 per year. Zolidar also offers a free basic plan to both.
“We want to build a sustainable business,” Agrawal said. “And we think that if our thesis is true, this can be a very large business. That’s the reason we are building it.”
Kothari and Agrawal’s goal is to become the go-to exit-planning infrastructure platform to help create not thousands but millions of employee-owned businesses in the US. About six million small and mid-sized companies will change hands by 2035 as baby boomers retire, and one million of those firms — representing up to $5 trillion in enterprise value — are viable candidates for sale.
The first step to that ambitious goal is to partner with nonprofit organizations that are at the forefront of evangelizing employee ownership in local business circles and advisor boardrooms. By partnering with nonprofits, Zolidar aims to offer an actionable next step to those business owners and advisors.
“We want to be the enabler and the technology partner to those in the ecosystem,” said Kothari. “There are millions of dollars being spent on awareness building, but that alone isn’t going to scale employee ownership. There needs to be a call to action so that owners have a step they can take next.”
Zolidar has partnered with Project Equity to expand the Oakland-based nonprofit’s EO Advantage program that offers support for advisors to guide clients through ESOPs, EOTs and worker-owned co-op transitions. EO Advantage offers learning programs for business owners and the professionals that work closely with them to expand their employee ownership expertise. Graduates from the programs will now gain direct access to Zolidar’s tools.
“This partnership is a game-changer for scaling impact,” said Project Equity’s Evan Edwards. “It bridges the gap between learning and doing — empowering advisors to confidently guide employee ownership transitions and giving business owners a self-directed path to explore their options.”
Zolidar has similar partnerships with the Employee Ownership Expansion Network and the Washington Center for Employee Ownership. Kothari says the company is finalizing additional partnerships with other employee ownership centers leading outreach to business owners and advisors.
About 300 ESOPs are formed each year, according to the National Center for Employee Ownership. Employee ownership trusts, or EOTs, and worker-owned cooperatives account for an even smaller pool.
“There’s a drop off that’s happening, and we want to solve this drop off,” says Agrawal. “We need to build this pipeline of businesses that are discovering employee ownership.”