Employee Ownership’s Financing Gap

Chapter 3 · Employee Ownership as Economic Development

By Julien Rosenbloom · September 2026 · 3 min read

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For the past decade, there have been about 6,500 ESOP companies in any given year, with new plan formation averaging just 269 per year.36 Indeed, despite employee ownership’s strong economic track record and broad bipartisan support, it has struggled to scale. A lack of reliable, abundant, and affordable private capital is impeding the growth of employee ownership.

Employee ownership is overwhelmingly the product of business succession. As an owner considers their exit options, financial and strategic buyers are frequently the most attractive; after all, these are buyers who will provide sellers with the bulk of the proceeds of their sale upfront. But those two pathways too frequently risk job loss or firm relocation out of state, and for the small businesses to whom these buyers are not flocking, the greater risk is outright closure altogether. Notwithstanding these evident risks, in the status quo, even those owners most keen on rewarding their employees or preserving their legacy by selling to an ESOP are often deterred from doing so for lack of liquidity.

This is largely due to the structure of the conventional ESOP transaction. Because workers bring no capital of their own, their stake is financed against the business itself and repaid through future cash flow.

There is limited equity capital to finance these transactions, so they are usually financed through some combination of the following:

  • Senior debt: A bank lends against cash flow and collateral, which in practice reaches two to four times EBITDA, enough at typical valuations to cover 40 to 60 percent of the purchase price.37
  • Long-term subordinated seller note: This subordinated note usually requires the seller to be repaid over five to ten years and could constitute as much as 60 percent of the sale.

Compared to a strategic or financial buyer, which provides the vast majority of the seller’s liquidity at closing, the subordinated seller note requires that the retiring business owner wait up to a decade to collect the proceeds of a business they built often over a lifetime. This is simply not a competitive value proposition for many business owners. The ESOP transitions that do happen, then, occur because of an unusually patient and motivated seller willing to subordinate their own immediate liquidity to the goal of employee ownership. That is a commendable business owner, indeed, but not a recipe for scale.

In order to scale, employee ownership must be more competitively positioned relative to a financial or strategic buyer. Broadly construed, employee ownership finance policy has two objectives to achieve this38:

  1. Create conditions for investors to generate competitive, risk-adjusted returns by deploying capital that offers liquidity to selling owners on par with strategic or financial buyers, and
  2. Minimize the cost of capital to the employee-owned firm.

Though these objectives are obviously in tension with one another, the tools in this playbook offer a menu of options for a state to supply or mobilize cheap enough capital while still driving competitive returns for its providers. Public capital can accept a below-market return, in part due to its long-term, patient orientation, and in part because the return on employee ownership is a public one. Credit enhancements lower the risk that a private lender carries so that they can supply more capital at lower cost to the ESOP. Institutional capital, pooled and deployed at scale, earns a competitive return across a diversified portfolio while providing substantial liquidity to the seller. These strategies are legible to development finance agencies because they have long been deployed to address a textbook challenge of development finance: a class of fundamentally creditworthy transactions that the private market underserves because the market is too thin, too new to the asset class, or unwilling to move first at scale.

Sources

Source numbering follows the full playbook.

  1. National Center for Employee Ownership, Employee Ownership by the Numbers (updated 2026) (new ESOP formation averaging approximately 269 plans per year, 2019–2023).
  2. SES ESOP Strategies, “ESOP Financing” (senior lending of roughly two to four times EBITDA, sufficient at customary valuations to finance 40 to 60 percent of the purchase).
  3. Moriarty, Financing the Growth of Employee Ownership (“the twin objectives of employee ownership finance policy are 1) to create conditions for investors to generate competitive risk-adjusted returns by deploying capital that offers liquidity to selling owners on par with non-ESOP buyers while 2) minimizing the cost of capital for the ESOP company”).