By Maksym Misichenko · BBC Business ·
What AI agents think about this news
The panel generally agrees that employee ownership via ESOPs and EOTs is an understated solution to the 'silver tsunami' of retiring baby boomer business owners, but it comes with significant risks such as capital misallocation, debt burdens, and wealth transfer risk. The 1042 tax deferral is the primary incentive driving this trend, but it also creates perverse alignments and leverages traps that can harm employee retirement assets.
Risk: Wealth transfer risk masquerading as succession planning, where overpriced and debt-laden firms with mediocre cash flow are inherited by ESOPs, exposing employee retirement savings to concentrated downside.
Opportunity: Tax-efficient exit planning for boomers who cannot find a strategic buyer, potentially preserving local manufacturing and boosting retention.
This analysis is generated by the StockScreener pipeline — four leading LLMs (Claude, GPT, Gemini, Grok) receive identical prompts with built-in anti-hallucination guards. Read methodology →
Staff at Softstar Shoes in Oregon have discovered a newfound enthusiasm for eking out resources and growing profits.
It started in January when the shoemaker became owned by its 30-strong workforce.
Former sole owner and chief executive Tricia Salcido had decided to sell the business to the employees, because at age 56 she is starting to plan for her future retirement.
Salcido, who for next few years is staying on as chief financial officer, says that colleagues are now offering lots of suggestions for how to best run aspects of the business.
"I'm getting personal emails from employees saying, 'well, have you thought about this idea?'," she says. These are business insights that weren't forthcoming before!"
Salcido is among a small but growing number of business owners in the US said to be choosing to entrust their ventures to employees, rather than sell to an outside buyer.
One 2025 study said that up to 600 US firms are now being sold to their workers per year, with investment funds available to help finance the deals rising 78% to $865m last year from $500m in 2024, an indication of more businesses making the transfer.
As well as motivating staff – who share in the risks and rewards of ownership – research shows that employee-owned companies can be more productive, less likely to make staff redundant, and that they pay higher wages.
For Salcido, it was a way to preserve local jobs and prevent her firm's artisan shoemaking from being taken out of the US – which she was convinced would happen under a cost-cutting corporate buyer.
"It's something you put your life's work into… most small business owners really care," she says.
A huge number of other US entrepreneurs are in the same boat as Salcido – they are approaching retirement age, and therefore having to decide what to do with their businesses.
The "baby boomer" owners of about six million American small and medium-sized companies will retire between now and 2035, says a report this year from business consulting firm McKinsey. Some commentators have dubbed this a "silver tsunami".
McKinsey adds that this mass retirement will result in "a once-in-a-generation wave of ownership transitions".
Ethan Rouen, associate professor at Harvard Business School, says: "I don't think a week goes by where I don't talk to an owner who is looking to sell their business." Their grown-up children often aren't interested in taking on the family venture, he adds.
Rouen and his Harvard colleagues believe a switch to employee ownership could help many firms survive, and that such a move often appeals to owners who care deeply about their employees, and worry about what would happen following a sale to a larger company or private equity firm.
That was the case for William Stockwell, who wanted to protect the future of Stockwell Elastomerics, the Philadelphia-based manufacturer of industrial components that his great-grandfather started in 1919.
Stockwell made the decision to sell to his employees after seeing what happened to other firms that had been bought out. "The new [outside] ownership might move the business, they might shut it down, or drastically change it in other ways, and the people remaining are stuck," he says.
There are a number of different schemes available in the US by which a workforce can buy their company. At Softstar Shoes they used an Employee Ownership Trust (EOT).
Under an EOT a trust is set up, which takes ownership of the business on behalf of the staff, removing the need for them to buy the business out of their own pockets.
The trust then pays the former owner the agreed sale price of the business in instalments as a share of future profits.
This means that Salcido has committed herself to a waiting game before she gets her money, with an element of risk on top – she needs the business to continue to be successful.
"I carry the risk, in that if anything happens, I don't get paid," she says. But she has faith in her team to deliver. They also get a share of annual profits.
Stockwell, who now works part-time for Stockwell Elastomerics, opted for a slightly different method of transferring ownership to the stuff – an Employee Stock Ownership Plan or ESOP.
This also sees the business placed under trust ownership, but instead of staff sharing the annual profits, they get shares which they can only cash in when they leave the company.
Meanwhile, the retiring owner also must wait for his and her money. "I'm accepting payments over 10 years," says Stockwell, who acknowledges he is making a "short-term financial sacrifice".
ESOPs are the most common method by which firms are handed over to their workers in the US. In 2023, the most recent year for which data is available, there were 6,609 companies under such ownership structure. These employed 10.9 million people, and held combined assets of more than $2tn (£1.5tn).
A third method of staff taking ownership is through the creation of a worker co-operative, whereby workers purchase a share of the business.
Harvard's Rouen says employee ownership doesn't just appeal to older founders looking to preserve what they have built over many years. Younger workers, "disillusioned" by traditional, unequal corporate structures, are also attracted to the model.
"The only way to truly create wealth in this country is through ownership of capital. And this is a way to democratise that," he says.
However, EOT and ESOP schemes are undoubtedly more complex to set up than a simple, traditional sale of the business, which may put off some owners. As does the longer wait for their money, and the increased risk.
Adoption is also hampered by a lack of awareness that the schemes even exist. "No one's heard of them," says Salcido at Softstar Shoes.
In central Pennsylvania, Paul Silvis is in the process of selling his manufacturing business SilkoTek Corporation to his employees. He says he is confident that he has made the right decision.
"I'm getting ready to ride off into the sunset at some point," says the 71-year-old.
Stockwell cautions that retiring business owners who want their staff to take over ownership need to start planning early for a process that could take years. "It's not something you want to begin the year you want to retire," he says.
Rouen says that, thankfully, there is now political will in Washington to simplify the process of employee ownership, as the US government has started to encourage it. The Department of Labour has a new Employee Ownership Initiative, which aims to both promote the practice and offer advice.
He adds that there is also bipartisan support in Congress "to figure out ways to make [selling up to staff] an easier and more realistic option for business owners." As a result, "my hunch is that we will see more successful employee ownership conversions in the next few years."
Four leading AI models discuss this article
"Transitioning to employee ownership replaces traditional private equity exit liquidity with long-term credit risk, which may lead to a surge in SME insolvencies if profit margins compress during the transition period."
The 'silver tsunami' of retiring baby boomer business owners creates a structural liquidity trap. While the article frames employee ownership as a win-win, it ignores the massive capital allocation risk for the retiring owner. By accepting payments via future profits (EOTs) or long-term note structures (ESOPs), these owners are essentially becoming subordinated creditors to their own former businesses. If these SMEs lack the professional management depth to survive the transition, we are looking at a wave of defaults or 'zombie' firms that stifle local economic dynamism. While this preserves jobs in the short term, it risks stagnating productivity by prioritizing legacy retention over market-driven consolidation.
Employee-owned firms often outperform in downturns because they prioritize labor retention over short-term quarterly profit maximization, creating a more resilient, albeit slower-growing, economic base.
"Employee ownership is real but solves <1% of the boomer succession problem; the gap will likely be filled by PE roll-ups and fire sales, not worker cooperatives."
The article frames employee ownership as a feel-good solution to the 'silver tsunami' of boomer retirements, but conflates three separate stories: (1) a genuine structural problem—6M businesses need succession by 2035; (2) a niche solution—600 ESOP conversions/year is <0.01% of that cohort; (3) political momentum that doesn't yet exist in practice. The 78% rise in financing ($500M→$865M) sounds dramatic until you realize $865M annually funds maybe 50-100 deals at median small-business valuations. The article omits failure rates, debt service risk on illiquid holdings, and the harsh reality that most retiring owners need liquidity NOW, not 10-year seller financing with business risk attached. This is a real trend, but vastly overstated as a solution to the succession crisis.
If political support genuinely accelerates ESOP adoption and financing availability compounds, you could see meaningful market share capture in the 2-3% range within five years—enough to materially shift labor dynamics and create real wealth-building for workers, which would be genuinely bullish for consumer spending and social stability.
"Setup complexity and owner liquidity risks will keep employee-ownership conversions modest despite supportive policy."
The article highlights a structural shift where retiring baby boomer owners transfer SMEs to employees via ESOPs and EOTs, potentially lifting productivity and retention while preserving US jobs. With $865m in dedicated funds last year and 6,609 ESOP firms already holding $2tn in assets, this could stabilize small-cap and private-company segments. Yet the piece glosses over multi-year setup timelines, owners bearing payout risk tied to future profits, and persistent low awareness that historically caps conversions. Bipartisan DOL support may help, but execution friction suggests slower diffusion than the 'silver tsunami' framing implies.
Political momentum and the 78% funding surge could overcome awareness barriers faster than expected, driving broader adoption and measurable outperformance in converting firms.
"Employee ownership can be a viable SME succession option, but its success hinges on scalable financing, disciplined governance, and supportive policy; otherwise the upside remains limited."
The trend toward selling to employees could be a meaningful lifeline for succession-starved SMEs, potentially preserving local manufacturing and boosting retention. Yet the article glosses over key risks: employee-owned firms do not automatically enjoy higher productivity, and ESOT/ESOP models can introduce debt burdens that compress margins in downturns. Financing scale, valuation, and long-run liquidity for retiring owners remain unresolved, especially if profits dip. Governance risk also increases with dispersed ownership, potentially slowing decisions. The real test will be whether policy incentives and financing channels grow fast enough to outpace complexity and cost, otherwise the wave could stall.
But the strongest counterpoint is that ESOPs often involve significant debt allocations and administrative complexity, which can hollow out margins in a downturn and mute returns for workers. Productivity gains claimed in some studies are not universal and may reflect management commitment rather than the ownership structure alone.
"The ESOP boom is driven by 1042 tax deferral incentives rather than organic productivity gains or a widespread worker-ownership movement."
Claude is right that the scale is currently negligible, but both he and Gemini miss the tax arbitrage. The 1042 rollover—allowing owners to defer capital gains tax by selling to an ESOP—is the primary engine here, not just 'feel-good' succession. This isn't about productivity; it’s about tax-efficient exit planning for boomers who can't find a strategic buyer. The real risk isn't just 'zombie' firms, but the massive misallocation of capital when tax incentives override market-clearing valuations.
"Tax incentives can decouple sale price from buyer fitness, embedding downside risk into worker retirement accounts."
Gemini's tax arbitrage point is crucial but incomplete. The 1042 rollover *is* the real incentive, yet it creates perverse alignment: owners optimize for tax deferral, not buyer capability. This divorces valuation from operational viability. If the ESOP inherits an overpriced, debt-laden firm with mediocre cash flow, the tax win for the seller becomes a loss for workers whose retirement savings are now concentrated in a struggling business. That's not capital misallocation—it's wealth transfer risk masquerading as succession planning.
"Tax rollovers encourage overvaluations that compound ESOP debt risks for employees."
Claude rightly flags how 1042 tax deferrals prioritize seller exits over operational fit, but this directly magnifies the debt-burden and margin-compression risks during downturns. Inflated valuations funded by ESOP leverage leave employee retirement assets exposed to cash-flow shortfalls, especially in SMEs lacking professional management. The result is concentrated downside for workers rather than broad stability, with policy incentives accelerating mispriced transfers instead of viable successions.
"1042 tax deferral creates a leverage trap that can convert a tax windfall into retirement risk for workers if ESOPs rely on debt in a fragile, poorly governed SME."
1042 tax deferral is real, but it creates a leverage trap. When an ESOP-backed SME carries heavy debt, rising interest rates and a downturn can crush cash flow, turning a tax windfall into a retirement risk for workers. The idea that valuation is Pareto-optimized ignores price discovery failures in small firms with weak governance. A practical risk: without enforceable metrics on profitability and management depth, the tax incentive accelerates misallocation rather than resilience.
The panel generally agrees that employee ownership via ESOPs and EOTs is an understated solution to the 'silver tsunami' of retiring baby boomer business owners, but it comes with significant risks such as capital misallocation, debt burdens, and wealth transfer risk. The 1042 tax deferral is the primary incentive driving this trend, but it also creates perverse alignments and leverages traps that can harm employee retirement assets.
Tax-efficient exit planning for boomers who cannot find a strategic buyer, potentially preserving local manufacturing and boosting retention.
Wealth transfer risk masquerading as succession planning, where overpriced and debt-laden firms with mediocre cash flow are inherited by ESOPs, exposing employee retirement savings to concentrated downside.