July 6, 2026

How ESOP Financing Is Changing in 2026

The Financing Picture for ESOPs Is Shifting

For years, business owners exploring an ESOP have run into the same obstacle: financing. Traditional ESOP transactions have relied heavily on senior bank debt covering only a portion of a company’s value, with the remainder typically filled by a seller note. That gap has made it harder for ESOPs to compete with other buyers who can bring more cash to the table at closing.

Most business owners assume the ESOP financing landscape is static, that the same lending menu and the same regulatory posture that existed five years ago still apply today. That assumption is increasingly out of date. Both the regulatory environment around ESOPs and the way banks are structuring ESOP loans have changed meaningfully over the past year, and those changes affect how much cash a seller can realistically expect at closing.

This post covers three developments worth understanding before you start (or restart) an ESOP conversation: a significant change in how the Department of Labor approaches ESOP oversight, legislation working through Congress that targets valuation standards and the financing gap directly, and new flexibility from lenders that is changing what a typical ESOP loan looks like.

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4 seconds
Welcome back to another episode of ESOP Radio.
6 seconds
I’m Ben Spadt and as always, I’m joined by Trevor Gilmore. We have a packed agenda. We’re covering three things.
12 seconds
The current state of ESOP legislation as of early June 2026, and what we’re seeing with ESOP lenders
20 seconds
and how lenders are getting more creative.
22 seconds
And our outlook for the second half of the year. Trevor, good to have you here. Always good to be here, Ben.
31 seconds
Well, let’s start with legislation.
33 seconds
A lot has happened since the start of the year. Where do you see things stand today?
38 seconds
You have been there’s real momentum in Washington.
41 seconds
So for those plugged into the space, you know what I’m talking about.
44 seconds
For those new to ESOP’s, you might not the biggest story for ESOP in 2026 has not been a new bill.
51 seconds
It’s been a fundamental shift in how the Department of Labor approached enforcement for years.
57 seconds
The Department of Labor, aka the Dol Employee Benefits Security Administration, also known as MSR, that’s what we call on industry is up here.
1 minute, 5 seconds
Listen to what ESOP code adopted last night.
1 minute, 8 seconds
Had you set out on its national enforcement hit list?
1 minute, 11 seconds
And basically what this means is a hey, let’s inspect your stops.
1 minute, 15 seconds
Be be out there scrutinizing transactions, what’s going on, and so on, above and beyond, just normal enforcement.
1 minute, 23 seconds
So it’s called what’s called an enforcement priority. That created an adversarial environment.
1 minute, 28 seconds
In January 2026, they removed Esops entirely from the national enforcement hit list. So that’s huge.
1 minute, 36 seconds
So basically, it’s giving a lot more comfort to both business owners and the entire Esop advisor industry as a whole.
1 minute, 43 seconds
2 million Esop advisors, quarterbacks, investment bankers, firms like many, you know, the trustees, the evaluators, you name it, banks.
1 minute, 51 seconds
You know, the whole ecosystem there.
1 minute, 53 seconds
So this has signaled a move towards a more principles based oversight framework, meaning that there’s going to be fewer surprised lawsuits and audits
2 minutes, 1 second
and a more predictable compliance environment.
2 minutes, 4 seconds
So overall, that gives Esop companies much more breathing room.
2 minutes, 7 seconds
And we welcome this change with open arms. That’s a huge change.
2 minutes, 11 seconds
And as far as active legislation, there are several bills that are working through Congress.
2 minutes, 17 seconds
The Retire through Ownership Act provides a clear definition of adequate consideration for valuing closely held stock.
2 minutes, 24 seconds
And when I say closely held stock, I mean Esop stock, essentially, stock that’s not traded on, you know, the New York Stock Exchange, Nasdaq.
2 minutes, 33 seconds
But we allow Esop fiduciaries to rely on independent appraisals under the IRS ruling, revenue ruling 5960, the bill and an offer forever.
2 minutes, 43 seconds
I’ve been saying, well, that’s what 59 means.
2 minutes, 46 seconds
1959, you know, so we have been dealing with this, it was this gray area where we don’t know what adequate consideration is.
2 minutes, 55 seconds
And so the bill passed Senate in October of last year.
2 minutes, 59 seconds
And, you know, we’re hoping for it to pass the House and then hopefully get signed into law.
3 minutes, 4 seconds
But basically having a clear cut set of rules as to what is how do we determine adequate concern and how much to pay for these companies.
3 minutes, 13 seconds
The Ownership Employee Ownership Fairness Act is another one.
3 minutes, 16 seconds
That one was in the Senate, and it would remove these Esop contributions from our total defined contribution plan limits.
3 minutes, 24 seconds
And basically, there’s 415 and 400 for testing.
3 minutes, 29 seconds
Are some of the are the two major compliance tests that this addresses.
3 minutes, 33 seconds
And one is the contributions that we make to Esops go against those limits.
3 minutes, 38 seconds
And so sometimes refunds need to be given if you contribute too much, either employer or employee.
3 minutes, 44 seconds
Or we can have some excise taxes if there are too big of contributions.
3 minutes, 49 seconds
And so what we’re saying is with Esops, they’re not so much like 401 KS that they need to be, under that same umbrella.
3 minutes, 56 seconds
And so we’re trying to remove those.
3 minutes, 58 seconds
And that’s what this Employee Ownership Fairness Act does.
4 minutes, 2 seconds
And it allows these employees to benefit from both 401 K’s and Esops.
4 minutes, 7 seconds
And both these bills that I just talked about help remove a lot of friction from our system. Our current system.
4 minutes, 14 seconds
And then the big one, Trevor, is the and I have to look at this or I had or Laura, you know is it. Yeah.
4 minutes, 22 seconds
What is what is it.
4 minutes, 23 seconds
So Ora is and actually let me talk a bit about the 415 a little bit. I mean, that’s a huge thing.
4 minutes, 28 seconds
Of course. Yeah, yeah. You fall under what’s known as a defined contribution plans.
4 minutes, 32 seconds
Just like for one case, however, they’re much different.
4 minutes, 35 seconds
You know, it’s we’re talking about company stock not necessarily cash just going in and getting allocated and you know and so on of time out stock that you know gets allocated. Right.
4 minutes, 44 seconds
So along with the spirit of that and treating it under the same bucket as a form okay.
4 minutes, 49 seconds
You know you can definitely have the argument.
4 minutes, 50 seconds
Hey let’s think about the Isa limitations.
4 minutes, 54 seconds
And then I know, you know, we’re talking to clients all day long about the corporate FDA, the 404, you know, and and so on. That all works.
5 minutes, 1 second
I can definitely see that argument that, hey, let’s think about the seesaw piece a bit different, right? Absolutely. Yeah.
5 minutes, 8 seconds
So let’s talk about AORA or AORA. Yeah.
5 minutes, 14 seconds
So AORA remains one of the most significant new ESOP bills in a generation.
5 minutes, 18 seconds
And it basically establishes a zero subsidy cost investment facility at the Commerce Department designed to unlock
5 minutes, 25 seconds
private capital for Esop formation and recapitalization through federal loan guarantees.
5 minutes, 31 seconds
So basically Tldr here, let’s summarize what this means.
5 minutes, 35 seconds
It’s very similar to the mortgage market is where people are thinking this should go.
5 minutes, 40 seconds
So you go out and get a house and traditionally you get a 30 year mortgage, right. Or maybe it’s shorter.
5 minutes, 46 seconds
You know, there’s all these different options or a ten year interest, only a 15 year, 30 year Ram or, you know, and so on.
5 minutes, 52 seconds
Traditionally, the financing sources for Esops have been senior banks and they’ll and a very simple example here, let’s say a company is worth
6 minutes
six times profit that they think will probably come in and say well then too. So what about the other four?
6 minutes, 6 seconds
Well, it’s usually it’s now maybe a private credit fund.
6 minutes, 9 seconds
I know that’s they’re very taking out what they want to lend to. I mean today is what June 5th.
6 minutes, 14 seconds
Wall Street Journal had a big article saying private equities pulling back and so on.
6 minutes, 18 seconds
And you know, we see that yes, it’s attractive for some industries as are and do some not.
6 minutes, 23 seconds
But overall there has been a financing gap for Esop formations.
6 minutes, 28 seconds
And that has been a pretty large barrier, especially for business owners who want max cash to close. Absolutely.
6 minutes, 35 seconds
And this was one of the major reasons why I was in Washington and talking with politicians last month.
6 minutes, 41 seconds
Well, in early May was talking about this and talking about how there’s really outside of the administrative costs.
6 minutes, 49 seconds
There’s no cost to taxpayers here.
6 minutes, 51 seconds
It is basically the government saying we believe in esops.
6 minutes, 55 seconds
We believe they should be funded in a traditional sense.
6 minutes, 58 seconds
So we’re putting the the government backing behind these loans.
7 minutes, 3 seconds
So much like an FHA loan or an SBA loan, but a little bit easier to get
7 minutes, 11 seconds
because we’re going through traditional lenders and saying, hey, I have this Esop, I want to sell 100%. I want to sell 100 to the Esop.
7 minutes, 20 seconds
And the lenders can say, okay, well lend, you know, maybe not 100%, but 80, 75 or however wherever their tolerance is.
7 minutes, 28 seconds
And the government says that they basically sign off on it.
7 minutes, 31 seconds
And if you know, if the provisions aren’t met, then, you know, there’s some safeguards they are in.
7 minutes, 38 seconds
And I think that’s going to open up a lot of doors for these esops.
7 minutes, 42 seconds
And it looks like it’s remaining active in committee right now. That’s huge because it’s not active. It’s dead right. You know. So yeah.
7 minutes, 49 seconds
So for Mesa at a moment. Yeah. Momentum here is building. So that’s all positive sign.
7 minutes, 54 seconds
And you know it seems like hey it’s you can figure out the financing piece.
7 minutes, 58 seconds
Then an Esop can truly come to the table and compete with other strategic buyers.
8 minutes, 4 seconds
I mean, strategic need on the whole value thing.
8 minutes, 6 seconds
But, you know, other buyers for the business that come to the table, but most of the capital clubs, right. So this could be a game changer.
8 minutes, 14 seconds
And you’re right, if it’s not active, it’s dead.
8 minutes, 17 seconds
And kind of piggybacking on the funding side and also the activity is the progress we’re seeing on the funding front
8 minutes, 25 seconds
in the fiscal year 2027 appropriations bill.
8 minutes, 29 seconds
So government again, just talking about, okay, we’re setting aside this money for something.
8 minutes, 33 seconds
The language that’s included in there is directing the Commerce Department to address the financing gap with Esops.
8 minutes, 40 seconds
And so bringing in that from the previous legislation that I was talking about and that Trevor was talking about, and they’re trying to kind of move that needle forward and move it into the 21st century.
8 minutes, 51 seconds
And again, bridge that financing gap. Exactly. Good point. Ben.
8 minutes, 56 seconds
And the committee report explicitly recognized that Esops can be an effective tool for retaining American companies, especially those undergoing business succession.
9 minutes, 5 seconds
And how many baby boomers are now?
9 minutes, 8 seconds
So here we talk with a lot of Gen X business owners every day about and I should know, millennial too.
9 minutes, 16 seconds
Talking to a lot of millennial that is this owners who created a business 510 years ago and then water it. Hey, what is my plan here?
9 minutes, 23 seconds
You know, overall we’re seeing planning starting earlier versus in the past and so many private businesses out there.
9 minutes, 30 seconds
I mean, all businesses basically have a succession problem, right? Every single one does.
9 minutes, 34 seconds
You need to have some success, a strategy and so on that there’s a liquidity piece that is on top of a lot of business owners minds, and it’s not going to go away, you know.
9 minutes, 43 seconds
So for Esops to kind of be competitive, which a lot of people are aligned with the Esop exit.
9 minutes, 49 seconds
And, you know, we always say if you own a business, then it’s better off independent. The Esop is probably the way to go.
9 minutes, 54 seconds
If it’s not for whatever reason, like, you know, deep personal risk companies are profitable.
10 minutes
You need to be part of a much larger player to really, you know, finish out the product stack and you know, be competitive and so on.
10 minutes, 7 seconds
Then you end up going to work, you know, because esops are driven by cash flows.
10 minutes, 11 seconds
And by that we mean have positive, healthy, stable cash flows, increasing cash flows.
10 minutes, 17 seconds
Well let’s get back to the financing piece here. So yeah overall and this is welcome news.
10 minutes, 23 seconds
And we definitely look forward to to seeing what develops here.
10 minutes, 26 seconds
You know ideally be a part of this this move here.
10 minutes, 29 seconds
And and in summary it’s a direct endorsement from Congress that financing remains an offset. But you know so that’s huge right.
10 minutes, 36 seconds
Actually trying to solve a problem. Right. Which is very awesome. Right.
10 minutes, 42 seconds
And you know we talked a lot about the problem.
10 minutes, 44 seconds
But legislation is moving in that in the right direction there.
10 minutes, 47 seconds
And I think the real story is that Washington is finally acknowledging, you know, with what you were talking about with FSA,
10 minutes, 55 seconds
with what we’re talking about lending, they’re finally acknowledging what we and others have known for years that esops work and that they need better access
11 minutes, 3 seconds
to capital to help kind of grease the wheels of these these plans and these ideas.
11 minutes, 8 seconds
And then speaking a little bit more towards lending, we’ve discussed the access piece, which is those government backed loans and, and and that’s being the biggest barrier.
11 minutes, 18 seconds
And we’ve been working on a couple deals together.
11 minutes, 20 seconds
And I, I thought it might be good to talk about how they’re getting a little bit more creative.
11 minutes, 25 seconds
And I was always told that creative bankers and creative accountants end up in prison. So maybe that’s not the right word.
11 minutes, 32 seconds
But what’s kind of the, the, the, the cutting edge of what we’re seeing in the lending? Yeah, yeah.
11 minutes, 37 seconds
I’ve been so what we’re seeing overall is for quality companies out there, banks are opening up their pocketbooks and wanting to lend for esops.
11 minutes, 47 seconds
So a lot of banks I mean, in the past, you always had to go to the niche players and some of the big nationals, you know, maybe a small few of the deals would go that way.
11 minutes, 55 seconds
And the Aboriginal players that are very into it now have Esop teams and so on.
12 minutes
But it’s always been kind of a niche market and we’re seeing that change a bit.
12 minutes, 3 seconds
You know, we’re seeing a broader interest in Esop lending.
12 minutes, 7 seconds
And on top of that, we are seeing more creative financing. Now.
12 minutes, 10 seconds
We’re not talking about like you know the let’s Evan mortgage crisis.
12 minutes, 14 seconds
You know, or you know, state income loans and you know all that. So we’re not talking about that.
12 minutes, 19 seconds
All we’re talking about is, okay, we have a company in that earlier example that’s worth six times profit.
12 minutes, 24 seconds
Well, the bank says, you know, I’m comfortable. Company has a clean balance sheet. Cash flow is good.
12 minutes, 29 seconds
These ratios all a good coverage ratios, fixed charge you know so on. But we want to manage our day one risk.
12 minutes, 38 seconds
So we’re going to come in and lend two times that.
12 minutes, 42 seconds
But we’re going to keep maybe another one X on standby.
12 minutes, 46 seconds
And if the company performs and meets its covenants over the next several quarters, whether it’s three quarters, four quarters, maybe up to two years,
12 minutes, 54 seconds
you know that they are what makes the most sense here.
12 minutes, 57 seconds
We’re going to then release another one X, and we’ll continue that path until the full resolvers paid for.
13 minutes, 3 seconds
So what this means for sellers is that they get an upfront payment that they have. Then they can use and reinvest.
13 minutes, 8 seconds
You know, they’re doing what’s called the 1042 rollover.
13 minutes, 11 seconds
That does take capital to do the tax deferral.
13 minutes, 14 seconds
If you’re a 1202 and we’re seeing more and more 12 of two bills to, you know, have to do.
13 minutes, 18 seconds
1042 you know, you just have 12 or 2 stock and and it won’t be capital gains on that tier.
13 minutes, 24 seconds
But now you have liquidity, you know, from the sell and that delta for the sellers, you know, is basically a seller know the earning interest. But then it gets paid down. Right.
13 minutes, 32 seconds
So I’ve seen banks being much more creative and just say, no, we’re not just going to come in at two.
13 minutes, 37 seconds
We’re going to do this structure here where if the company performs Mehta’s covenants and everything is going well, you know,
13 minutes, 44 seconds
we’re then going to basically dry down on that sour note and increase the total amount that we’re committing.
13 minutes, 50 seconds
So that’s great because that is much more flexible than the past, where in the past you would just see, you know, one loan and that’s it.
13 minutes, 57 seconds
You know, they’re you’re talking about a whole day loan only facility in two years.
14 minutes
And when you want to come in and refinance. So we’re seeing that structure. These are called accordions.
14 minutes, 6 seconds
There’s other terms in the banking industry to describe what we’re talking about.
14 minutes, 9 seconds
But that’s basically the gist of it is looking at a long term facility that is looking at the full value, the full cash flows
14 minutes, 18 seconds
and basically timing the risk according to covenants.
14 minutes, 20 seconds
You know, it is basically a is and I’m going to draw on that so that, you know, can definitely be utilized.
14 minutes, 29 seconds
So, a lot of clients are interested in that, you know, because it’s flexible, you know, and so on.
14 minutes, 35 seconds
And I, I think, you know, that’s very important is that, you know, whether it’s an accordion, you know, we’re stretching out
14 minutes, 42 seconds
perhaps the time or the elevator where we’re offering more money if certain criteria are met.
14 minutes, 49 seconds
Neither of these need to open up a new loan.
14 minutes, 51 seconds
There’s you don’t have to do a new due diligence. You don’t have to.
14 minutes, 55 seconds
You know, the the bank is now keeping the, the their finger on the pulse for much longer.
15 minutes
But in an effort to lend you more money and to maintain a stronger relationship.
15 minutes, 5 seconds
So, you know, the company doesn’t have to jump through all the same hoops of setting up a new lending arrangement for that second piece, that second tranche of funds.
15 minutes, 14 seconds
The bank says, we’ll lend you this much now, and if it goes well, we could stretch that out.
15 minutes, 18 seconds
Or we can, you know, perhaps do some other elements.
15 minutes, 22 seconds
And I think that’s important because it’s beneficial to both sides there. Exactly.
15 minutes, 26 seconds
And it really shows that lenders are looking for long term relationships, especially these hot lenders.
15 minutes, 32 seconds
You know, because I understand Aviva well cash flowing companies that are in it for the long term.
15 minutes, 37 seconds
You know and and we see in our quite a bit as you know, clients that leave it around for 52 years since 1974. Yeah.
15 minutes, 44 seconds
One of our advisors in the 80s that deals for a two, three, nine and all those companies are a 200 million.
15 minutes, 50 seconds
So if you’re a bank, you know, go to that whole process.
15 minutes, 52 seconds
I mean, that’s been and also quite a heck of a deposit.
15 minutes, 55 seconds
You know, I think the Treasury management, you know, think of this and that.
15 minutes, 58 seconds
So banks are looking at the long term relationship here and the long term opportunity versus just, hey, you know this is what we see here now and that’s it.
16 minutes, 7 seconds
You know, and and so on.
16 minutes, 9 seconds
So that’s definitely a positive move for the industry is is finding that, you know, fighting those long term banking relationships that see the value.
16 minutes, 18 seconds
And then for the clients as well having that long term partner.
16 minutes, 21 seconds
Because most successful you saw companies do grow over time.
16 minutes, 25 seconds
And they’re going to need much more sophisticated help over time as well. So that’s been a total welcome change.
16 minutes, 31 seconds
And overall shows the long term thinking involved in our industry. You know Esop is a long term play.
16 minutes, 38 seconds
And now you so a little bit about this before. But seller notes still remain common.
16 minutes, 44 seconds
And the classic financing structure is still a combination of a senior bank loan like you said 1 or 2 times profit.
16 minutes, 50 seconds
And then the remainders on that seller note, the seller takes that note for a period of time and it gets paid over time.
16 minutes, 59 seconds
The structures, you know, been there forever, but now we have more options.
17 minutes, 3 seconds
We could do a delayed draw note like you, established that accordion for future growth on that menu has expanded dramatically.
17 minutes, 12 seconds
And I think the other piece of that that’s cool and kind of important is banks are reaching out to us and banks will say, hey, let me take a look at something
17 minutes, 20 seconds
even if they don’t offer a financing for this, this, you know, this particular case, they’re curious about it. They want to see more.
17 minutes, 28 seconds
They want to see what are these companies doing? Because you’re right. They are great investments.
17 minutes, 31 seconds
They are strong companies that are around forever.
17 minutes, 34 seconds
But I think layering that that menu has, kind of expanded now. And the appetite has also expanded.
17 minutes, 43 seconds
And I think, you know, with the coupled with that legislation, things things are looking up. Absolutely, absolutely. Yeah.
17 minutes, 51 seconds
And also on the financing front too, you know, we are seeing lower interest rates and we’ve seen an selling or seven, back when Prime was 8.5,
18 minutes
just a couple of years ago, you know, senior loans were hovered around that.
18 minutes, 3 seconds
And now we’re seeing loans somewhere like Sofr plus, anywhere from 1.5 to 2.5, depending on company size, you know, cash flows and so on.
18 minutes, 11 seconds
And so what that means for interest rates is, you know, basically we’re looking at high fours to, low sixes right now. All right.
18 minutes, 18 seconds
So banks have become much more competitive with rates.
18 minutes, 22 seconds
But you know and those rates are going right I mean prime right now is is where it’s at you know. And who knows.
18 minutes, 28 seconds
But but overall you know the key summary is and this discussion is that, you know, for for companies with solid financial solid cash flows, you are most likely bankable.
18 minutes, 38 seconds
You know, you’re on a decent term and it’s talking about these acronyms here, you know, that are terms.
18 minutes, 44 seconds
You know, the accord in the elevator, Space-x is going public ahead next Friday. That’s a week from today.
18 minutes, 52 seconds
Like, where’s the where’s the rocket ship feature I know yeah. To the moon element. Right.
18 minutes, 58 seconds
That’s funny, but a lot of what you’re saying, you know, is we’re we’re kind of talking we’re we’re touching on that next topic.
19 minutes, 3 seconds
And it’s, it’s a great segue is, you know, the outlook where, you know, lenders are happy to land.
19 minutes, 9 seconds
We were you and I both we were on a call and then we looked up what Sofr was in this current moment, just to kind of gauge where we would be.
19 minutes, 17 seconds
And we’re both pleasantly surprised that it was lower than we thought. So you’re right.
19 minutes, 22 seconds
You know, we’re getting much better rates, much better terms.
19 minutes, 25 seconds
People are and lenders are more excited to to lend.
19 minutes, 28 seconds
But yeah, along with the accordion and elevator, we do need a rocket ship.
19 minutes, 32 seconds
But when we’re looking for towards the future and looking towards the rest of 2026, what do you see on the horizon?
19 minutes, 40 seconds
Yeah, so I’m very optimistic for the industry as a whole for the rest of this year.
19 minutes, 44 seconds
I mean, we see a lot of deals here at we’re talking to a lot of business owners every day.
19 minutes, 49 seconds
I, you know, you and I at our advisory team, you know, that’s what we do.
19 minutes, 53 seconds
I do business hours day in and day out about these sub options.
19 minutes, 56 seconds
What makes sense value, how to position on a plan, what the financing situation looks like. There’s an economic driver too right. And and all that.
20 minutes, 4 seconds
So those calls have not slowed down.
20 minutes, 7 seconds
And our deal volume, you know in terms of what’s in our pipeline and so on.
20 minutes, 10 seconds
So overall 2026 looks a very strong end to the industry as a whole.
20 minutes, 16 seconds
You know, talking to people in industry, you hear a lot of activity out there, and it just makes sense when you look at the raw number of businesses
20 minutes, 24 seconds
owned by X, owned by still owned by baby boomers and even vinyls. Right.
20 minutes, 29 seconds
And what we’d notice is a module on Gen X generations, our planners, and much more so than, you know, possibly with their parents.
20 minutes, 37 seconds
So they want to create a game plan. And these is so flexible.
20 minutes, 41 seconds
So all minority companies like the US can actually do a contributory Esop or do the pre fund, or we can go another hundred percent.
20 minutes, 49 seconds
A lot of strategies out there that I can get the ball rolling on a solution, on a strategy now.
20 minutes, 56 seconds
So those are always fun discussions right to have.
20 minutes, 59 seconds
And we’re having those day in and day out. So long story short I’m bullish.
21 minutes, 3 seconds
You know I’m on Esops still you know and it’s the same old story.
21 minutes, 7 seconds
You know you saw versus private equity where it’s a strategic you know for for companies that can go down the strategic path right.
21 minutes, 14 seconds
So you know you two typically have a fork or maybe you have three options. Right.
21 minutes, 19 seconds
But that said the the Esop is usually a sure bet.
21 minutes, 22 seconds
You know, valuation expectations are aligned. And you know, the financing and all that.
21 minutes, 27 seconds
You know, the likelihood of that going forward with the deal.
21 minutes, 29 seconds
We have a company with a good team, you know, and so on.
21 minutes, 34 seconds
Giving them skin in the game can make tons of sense. Absolutely.
21 minutes, 37 seconds
And talking about the giving them skin in the game, you know what?
21 minutes, 41 seconds
We don’t really touch on it much because we’re more on the front end. But what about employee demand?
21 minutes, 46 seconds
You know, how what’s the sentiment with individuals that don’t work for Esop companies or are curious or started working for their first one?
21 minutes, 55 seconds
Definitely.
21 minutes, 55 seconds
Employees are definitely out there and starting to realize the benefit of working for a company that has equity as part of its compensation.
22 minutes, 5 seconds
So Esop companies are, you know, that’s one of the biggest models out there.
22 minutes, 9 seconds
So then you and I talked a couple weeks back about the trend in the Central Valley here in California, that employees in the Central Valley are actually seeking out Esop owned companies. Yeah.
22 minutes, 19 seconds
And we’re we’re seeing that, you know, and once employees understand that, especially if they’ve worked or they’ve had a friend, family member work for an Esop company
22 minutes, 27 seconds
and got basically a surprise money, you know, you do get a statement every year, but a lot of people don’t think it’s real till they actually cash out
22 minutes, 35 seconds
and get the money, because that’s when it actually turns real. They see the power of that and it’s real. You know, it’s this is a real thing.
22 minutes, 41 seconds
And you know, we see that across our client base, you know, and then part of the sustainability when we work with clients
22 minutes, 48 seconds
projecting out the cash flows and the buying back needs, there’s a lot of wealth that’s generated out there.
22 minutes, 54 seconds
And employees want to be a part of that because what’s the alternative? You know, and not having. Right. Yeah.
23 minutes, 1 second
Well the more awareness out there more education.
23 minutes, 4 seconds
And yeah, as we say, if you build things, if you’re crucial to the organization and so on, I mean, having equity, having some skin in the game just makes a lot of sense because I’m going to work harder.
23 minutes, 14 seconds
I better work smarter, more efficient and contribute to the bottom line because it’s my teacher, it’s your future, you know, so on and you’d have that incentive.
23 minutes, 24 seconds
That’s incentive is huge.
23 minutes, 25 seconds
And then also like you said when you open that statement sometimes oh my first one’s $2,500. It’s not all that exciting. And I’m only partially vested.
23 minutes, 34 seconds
But once you get five, 6 or 7 years into the plan and you start to look at it and you think, oh, that’s a real number, now that’s a number worth sticking around for.
23 minutes, 41 seconds
But also, how can I make that number bigger?
23 minutes, 44 seconds
And I have control over it in some part, you know, whereas when I put money in my 401 K and I’m investing in Apple, Coca-Cola or whatever,
23 minutes, 52 seconds
I don’t necessarily have control over how well those companies do.
23 minutes, 56 seconds
So, you know, we’re talking a lot about positive trends for 2026, but are there any cautionary notes for the second half of this year? Yeah.
24 minutes, 3 seconds
And this yeah, this is definitely relevant today. And IT owners.
24 minutes, 7 seconds
But the valuation expectations and there is a difference between valuation and price. All right.
24 minutes, 13 seconds
Price is the price at which you buy and sell something. Value is a range. And that’s a value range right. So expectations on the value front.
24 minutes, 21 seconds
Absolutely.
24 minutes, 23 seconds
You know the read Wall Street Journal here.
24 minutes, 25 seconds
You read hey these companies have no profit yet they’re valued at this.
24 minutes, 28 seconds
Obviously the I data set area that all data system insane expectations with their pricing and all this insane future growth. Right.
24 minutes, 36 seconds
And discounting that to today is our companies by definition for the most part are going to be mature stabilized with some healthy growth,
24 minutes, 45 seconds
you know, so overall you’re talking about probably a single digit EBITDA multiple.
24 minutes, 51 seconds
An EBITDA is basically another word for profit. Yeah.
24 minutes, 54 seconds
So profit times are planning you know for Esops nearly all deals out there.
24 minutes, 58 seconds
And you have some people who will show you, you know, the extreme upside using the warrants and how it’s higher and so on.
25 minutes, 4 seconds
But generally speaking a negotiate a deal is going to be in that single digit.
25 minutes, 8 seconds
And it depends what industry you’re in, what the future cash flows are.
25 minutes, 10 seconds
And you know what your overall cap rate is on the behavior. You should, you know, and so on. The risk that the cop’s some valuation. That’s what he said.
25 minutes, 18 seconds
And you know, we always start off with that discussion so that we have something rooted in reality with our clients and we have access,
25 minutes, 27 seconds
you know, of course, man, and all the database and as and all the deals we’ve done and, you know, and so on.
25 minutes, 31 seconds
So it’s yeah, that’s always the first discussion if you want to go down the easy path is understanding that value range.
25 minutes, 39 seconds
Is that interesting.
25 minutes, 40 seconds
What’s the lever if I actually achieve you know the company has very high growth rate.
25 minutes, 45 seconds
You know, what does it look like if I stay the course and maybe do a small deal now, get some liquidity off, spread ownership
25 minutes, 53 seconds
and then do a bigger deal in a couple of years. And we do a lot of those.
25 minutes, 56 seconds
The minority esops where we saw less than 50%, and you consider a control 100% sell or going to 100% several years in the future. Right.
26 minutes, 6 seconds
And that that’s part of the whole discussion is, hey, where are you positioned today? Where do you want to be? Where are you headed? And what makes the most sense?
26 minutes, 13 seconds
And I mean, you’re absolutely right.
26 minutes, 15 seconds
And I think that focusing on the company itself and, and what moves the needle for that value, which now is the operations
26 minutes, 23 seconds
of the company, how much money are we putting down towards profit?
26 minutes, 26 seconds
How much of revenue trickles down all the way to profit? And what’s driving that? And how can you know? How are we best modeling that?
26 minutes, 33 seconds
Because, you know, if you remember the original tax Cuts and Jobs Act, back in 2016, 2017,
26 minutes, 40 seconds
that was a sweeping change that changed the corporate tax rates, that made everybody’s business worth more because they’re paying less tax.
26 minutes, 48 seconds
There’s not going to be anything like that.
26 minutes, 49 seconds
That is just going to be a sweeping change.
26 minutes, 52 seconds
So it’s really focusing on your fundamentals, really focusing on your company and that’s where the value is going to stem from
26 minutes, 59 seconds
is is the operations of the company and future cash flows.
27 minutes, 3 seconds
So exactly that you saw a cash flow buyer. You know that’s what it is.
27 minutes, 7 seconds
You know, the cash flows in the company is what supports the debt overall. So it all also work out. Right.
27 minutes, 13 seconds
So it’s it’s fun stuff that I so yeah we talked about these conversations every day. Then these outfit analysis. Hey how does this whole thing shake out.
27 minutes, 20 seconds
No absolutely.
27 minutes, 21 seconds
And I laugh because you’re absolutely right.
27 minutes, 24 seconds
You know, we do talk about this every day multiple times a day. And it’s it’s a good thing. You know, there is strong activity.
27 minutes, 30 seconds
And you know, the fact that we’re seeing more creative financing and that ownership culture, that skin in the game feeling is continuing to gain traction.
27 minutes, 38 seconds
And everybody’s seeing it. Absolutely.
27 minutes, 40 seconds
And, I know you and I had both kind of valuation adds here.
27 minutes, 43 seconds
One of my pastimes is taking a bring a trade to the car auction website.
27 minutes, 47 seconds
And guess, you know, where I think, you know, whichever car, where it’s going to trade and then going back and looking at the results and, you know, these are seven, nine
27 minutes, 55 seconds
now I think the premiums like what, 11 days maybe, you know, a long say, okay. How close was I. You know. And it’s not. So you look you know. Yeah.
28 minutes, 3 seconds
But it’s because you think about yeah.
28 minutes, 5 seconds
What are the elements that go in and into a sale.
28 minutes, 9 seconds
And sometimes you get somebody and that’s what we mean by strategic.
28 minutes, 13 seconds
Somebody is going to come in and find something that is valuable to them and only them and will pay more.
28 minutes, 18 seconds
But by and large it’s going to fall within a certain range. Absolutely. Yeah.
28 minutes, 22 seconds
There’s a lot to be excited about here, a lot of good stuff.
28 minutes, 25 seconds
And you know, let’s see what happens with the other disappointing deal.
28 minutes, 29 seconds
You know let’s we’re definitely tracking that closely here.
28 minutes, 32 seconds
We’re going to keep it run update as we learn more. And there you know as well. So yeah everyone that’s it for today.
28 minutes, 37 seconds
Thanks for joining us Hope everyone has an awesome day.
28 minutes, 40 seconds
Shoot us a note to talk about you saw fit.
28 minutes, 42 seconds
Follow us on LinkedIn, Spotify, YouTube, Apple or Menke.com. Have an awesome day everyone. Thanks for joining us. Take care. Thanks and goodbye.

A Major Shift in DOL Enforcement

For years, the Department of Labor’s Employee Benefits Security Administration (EBSA) treated ESOPs as a national enforcement priority, meaning ESOP transactions received a heightened level of scrutiny beyond normal plan oversight. That posture contributed to an adversarial relationship between the agency and the ESOP community.

In January 2026, the Department of Labor removed ESOPs entirely from its national enforcement priority list. This signals a move toward a more principles-based oversight framework, which generally means fewer surprise audits and lawsuits and a more predictable compliance environment for ESOP companies, trustees, and advisors. Business owners weighing an ESOP for the first time should understand this as a change in posture, not a change in the underlying fiduciary and valuation rules ESOPs are still required to follow. Any specific compliance question should still be reviewed with ERISA counsel.

Legislation That Could Reshape Valuation and Financing

Several bills are currently working their way through Congress that directly address two of the biggest pain points in ESOP transactions: valuation certainty and financing access.

Defining “Adequate Consideration”

One bill, the Retire Through Ownership Act (S. 2403 in the Senate, sponsored by Sens. Roger Marshall and Tim Kaine; H.R. 5169 in the House, sponsored by Rep. Rick Allen), would provide a clearer definition of “adequate consideration” for valuing closely held stock, building on the standard set out in IRS Revenue Ruling 59-60. Currently, what counts as adequate consideration in an ESOP transaction has been something of a gray area. The Senate passed the bill by unanimous consent in October 2025, and the House Education and Workforce Committee approved the companion bill unanimously in September 2025; it is now awaiting a vote before the full House. If signed into law, it would give ESOP fiduciaries a clearer, more defined standard to rely on when relying on independent appraisals.

Removing ESOPs From Standard Contribution Limits

A second bill, the Employee Ownership Fairness Act, would remove ESOP contributions from the standard defined contribution plan testing limits that also apply to 401(k) plans (commonly referred to as 415 and 404 testing). Under current rules, ESOP contributions can trigger refunds or excise taxes if combined contribution limits are exceeded. This bill would treat ESOP contributions separately, allowing employees to benefit fully from both a 401(k) and an ESOP without running into those combined limits. As of mid-2026, the bill has not yet received a committee vote; it was held back over cost concerns and is still being refined, so its path forward should be confirmed before referencing it as active legislation.

A Federal Loan Guarantee Facility for ESOPs

The most significant proposal under discussion, the American Ownership and Resilience Act (H.R. 3248 in the House, sponsored by Rep. Blake Moore; S. 1645 in the Senate, sponsored by Sens. Chris Van Hollen and Jerry Moran), would establish a zero-subsidy investment facility at the Commerce Department, aimed specifically at closing the ESOP financing gap. Rather than the government lending directly, the bill would license private investment funds, called Ownership Investment Companies, to raise and manage capital for ESOP sales, backed by federal loan guarantees, in a structure similar in concept to FHA or SBA-backed lending. The goal is to give sellers a source of financing beyond a senior bank loan and a seller note, at no direct cost to taxpayers beyond administrative costs. As of this recording, the bill remains active in committee. Separately, the FY2027 appropriations bill includes language directing the Commerce Department to address the ESOP financing gap, and the accompanying committee report specifically recognizes ESOPs as a tool for retaining American companies through business succession. Neither of these has been signed into law, and business owners should treat this as a proposal to watch rather than a financing option available today.

How ESOP Lenders Are Getting More Flexible

Beyond legislation, banks themselves are changing how they structure ESOP loans. A growing number of banks now have dedicated ESOP lending teams, a shift from a lending market that was historically limited to a small group of niche players.

Tiered, Covenant-Based Structures

Rather than issuing a single fixed loan amount, some banks are now structuring ESOP loans in tiers, sometimes called an accordion structure. As an illustrative example discussed on the episode: if a company is valued at six times profit, a bank might initially lend two times profit while holding an additional commitment in reserve. If the company meets its financial covenants over a set period, ranging from a few quarters up to roughly two years, the bank releases additional committed funds without requiring a new loan process or a new round of due diligence. This gives sellers an upfront payment they can use for a Section 1042 rollover or other reinvestment, while the remaining commitment is released as the company demonstrates continued performance.

Seller notes remain a standard part of the financing mix as well. The classic structure, a senior bank loan covering one to two times profit paired with a seller note for the remainder, is still common, though delayed-draw note structures have expanded the range of options available.

Where Interest Rates Stand

Current ESOP senior loan pricing is generally running at SOFR plus approximately 1.5 to 2.5 percentage points, depending on company size and cash flow, which translates to roughly high-4% to low-6% rates as of this recording. That compares to a period roughly two years earlier when Prime stood at 8.5%. Rates are tied to prevailing benchmark rates and will move with the broader rate environment, so current figures should be verified with a lender at the time of any transaction.

Valuation Expectations for the Rest of 2026

Despite the positive financing and regulatory developments, valuation expectations remain a point business owners should approach carefully. It’s worth separating two concepts: valuation, which is a range, and price, which is what a transaction actually closes at.

For most ESOP transactions, because target companies tend to be mature, stabilized businesses with steady rather than speculative growth, pricing typically falls within a single-digit EBITDA multiple (EBITDA being a common shorthand for profit before certain non-cash and financing costs). This is a different environment than headline-grabbing valuations tied to speculative growth assumptions. Business owners should also not expect a repeat of the kind of broad, one-time valuation lift that came from the 2017 Tax Cuts and Jobs Act’s corporate tax rate changes; no similarly sweeping change is on the table currently. Instead, company-level fundamentals, operating cash flow, and the trend in profitability are what will primarily drive valuation in the current environment. Any specific valuation discussion should involve a qualified valuation professional familiar with your company’s financials and industry.

Looking Ahead

Taken together, these developments point toward a more workable environment for ESOP transactions than in recent years: a less adversarial regulatory posture, legislation aimed directly at the financing gap, and lenders willing to structure deals more flexibly. None of this changes the fundamentals, however. Company cash flow, valuation discipline, and realistic planning still drive whether an ESOP makes sense for a given business. Business owners who are considering succession options should use this environment to start, or revisit, that planning conversation now rather than waiting for legislation that has not yet passed.

If you are weighing an ESOP against other succession options, Menke can walk through what the current financing and regulatory landscape means for your specific situation. Start with our Feasibility Questionnaire for a Free Preliminary Analysis, or contact us directly to talk through where you stand.

The information in this post is drawn from an ESOP Radio episode discussion and is intended for educational purposes only. Tax rules, ERISA requirements, plan document provisions, and individual financial circumstances vary. Consult your CPA, financial advisor, or ERISA counsel before making decisions about ESOP distributions, IRA rollovers, or retirement planning.

Considering an ESOP?

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    • structural viability
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About ESOP Radio

ESOP Radio is the official ESOP podcast from Menke ā€” where real stories of growth, succession, and long-term wealth building are told.

Hosted by Trevor Gilmore and Ben Spadt, the show features conversations and educational episodes designed to help business owners better understand employee ownership.

Disclaimer

This podcast is provided for educational purposes only and does not constitute legal, tax, investment, or fiduciary advice.

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Why 2026 is the Time for ESOPs

Strong companies are using ESOPs to play offense. With rates stabilizing and talent still tight, employee ownership is delivering a durable edge:

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    • Major Tax Efficiency. Enable capitalā€‘gains deferral for selling shareholders (Section 1042 eligibility) and reduce or even eliminate ongoing corporate income tax for Sā€‘Corporation ESOPsā€”freeing cash for growth.
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Bottom line: ESOPs create a rare winā€‘winā€‘winā€”for owners, the business, and employees.

What Youā€™ll Learn

ESOP 101ā€”Modern Playbook
How ESOPs work in 2026, who qualifies, deal structures, and timelines.

Tax Strategies that Change the Math
Capitalā€‘gains deferral, corporate tax reduction/elimination for Sā€‘Corp ESOPs, deductible contributions, and cashā€‘flow modeling.

Talent & Culture
Retention without acrossā€‘theā€‘board raises; ownership communications that actually move the needle.

Protecting Margins
How ESOP incentives can offset cost inflation and support reinvestment.

Valuation & Financing in Todayā€™s Market
Bank/seller notes, mezzanine options, rate considerations, and why ā€œbankable ESOPsā€ are closing now.

Governance & Control
Board, trustee, and management rolesā€”what really changes (and what doesnā€™t).

Who Should Attend

    • Business OwnersĀ planning an exit, partial sale, or recapitalization

    • CFOsĀ evaluating capital structure and tax strategy

    • Advisors & Succession PlannersĀ guiding ownerā€‘led companies

    • HR & ESOP Committee MembersĀ building engagement around ownership

Agenda (90 Minutes)

    1. Welcome, Speakers & Why ESOPs in 2026Ā (5 min)
      Quick orientation; who Menke is and why ESOPs are winning right now.
    2. ESOP Basics & Business Owner BenefitsĀ (10 min)
      What an ESOP is; liquidity, diversification, succession, productivity.
    3. Mythā€‘Busting: What ESOPs Doā€”and Donā€™tā€”RequireĀ (5 min)
      No, you donā€™t have to sell 30%+, borrow big, or give up control.
    4. Deal Structures & Transaction PathsĀ (10 min)
      Cashā€‘contribution (payā€‘asā€‘youā€‘go), leveraged (bank/seller notes), and stock contribution; when each fits.
    5. Typical Scenarios & OutcomesĀ (10 min)
      Gradual sales, minority/majority sales, 100% buyouts, and recap strategies.
    6. Whoā€™s a Strong Fit (and Common Constraints)Ā (5 min)
      Profitability, team/transition readiness, industry notes.
    7. Tax Strategy Deep DiveĀ (10 min)
      Sā€‘Corp ESOP distribution savings; Cā€‘Corp Ā§1042 capitalā€‘gains deferral; entityā€‘path options.
    8. Valuation & Pricing vs. Thirdā€‘Party SalesĀ (8 min)
      FMV standards, control vs. minority value, practical comparisons.
    9. Financing the ESOPĀ (8 min)
      Bank market overview, seller paper, balanceā€‘sheet effects, cashā€‘flow modeling.
    10. Plan Operations & Employee CommunicationsĀ (8 min)
      Eligibility, vesting, distributions, disclosures, and how transparency drives results.
    11. Culture, Engagement & Measured Performance UpliftĀ (6 min)
      What changes on day 2; tying ownership to productivity.
    12. Roadmap & Next StepsĀ (3 min)
      Feasibility, design/adopt, contributions, and timing the sale.
    13. Live Q&AĀ (2 min)

Hear From Past Attendees

ā€œI came in skeptical. I left with a concrete roadmap and the math to brief our board.ā€

ā€” Mark T., CFO, Manufacturing

ā€œThis clarified our exit plan and showed how we can reward employees at the same time."

ā€” Susan D., Founder & CEO, B2B Services Firm

Your Presenter: Phil DeDominicis

Phil DeDominicisĀ is an ESOP strategist and M&A advisor who has guided 300+ companies through ESOP formations, financing, and transactions overĀ 20+ years at Menke & Associates. He specializes inĀ selling ESOPā€‘owned businessesĀ to financial or strategic buyers and inĀ helping ESOP companies acquire other businesses.

Before Menke, Phil spentĀ 14 years in investment banking M&AĀ atĀ Morgan StanleyĀ andĀ Salomon Smith Barney, advising middleā€‘market companies on changeā€‘ofā€‘control transactions. He holds aĀ B.S. in Chemical EngineeringĀ from theĀ University of DelawareĀ (1985) and anĀ MBA in Finance & AccountingĀ fromĀ UCLA AndersonĀ (1989). Phil currently serves onĀ six forā€‘profit and notā€‘forā€‘profit boards.

What Phil will cover:

    • Where ESOPs win in 2026 (tax, talent, and control)
    • Owner liquidity paths: minority, majority, and 100% sales
    • Financing options and what lenders look for
    • Valuation reality vs. thirdā€‘party sales
    • How to prep a board, trustee, and employees for a successful close

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FAQ (Quick Hits)

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    • Is this only for certain industries?Ā ESOPs work across sectors when cash flow is stable and leadership continuity matters.

    • Can we do a partial sale?Ā Yesā€”stage liquidity over time while capturing tax benefits.

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