Offense is the Best Defense: Why ESOPs Need an M&A Playbook Now

Employee-owned companies can capitalize on a dynamic small business M&A market and use acquisitions to compete, grow, and fulfill their fiduciary duty.

Small businesses that employ tens of millions of American workers will sell to new owners this decade, creating both a risk and an unprecedented opportunity to transition these businesses to long-term, sustainable ownership models.

As Baby Boomer business owners retire and sell their companies, a growing ecosystem of sophisticated small business buyers, including family offices, private equity firms, search funds, and employee ownership investors, looks to capitalize on the increasing supply of opportunities. In fact, the small end of the market is seeing the greatest activity from professional investors. Last year over 40 percent of U.S. businesses acquired by private equity firms were valued at less than $25 million.

The wave of businesses expected to change hands creates a generational opportunity to expand shared ownership models, bringing the opportunity for wealth building to millions more workers. Companies that are founder-led, profitable, and deeply rooted in their communities are ideal candidates for employee ownership. However, the same market forces fueling this opportunity also pose a threat.

As lower-middle market companies become more visible to a wider variety of investors, these businesses, once largely insulated from outside interest, are receiving unsolicited offers to sell. Even existing ESOPs, with proven businesses and strong cash flow, are increasingly in the crosshairs of financial buyers. In this environment, ESOP trustees, boards, and management teams must be prepared to respond strategically, balancing long-term mission alignment with financial realities.

This is a high-stakes challenge, as the fiduciary duty of ESOP boards and trustees demands a complete assessment of credible acquisition offers. The board’s analysis must include whether the ESOP has a clearly articulated strategic plan capable of delivering comparable or better value to plan participants. Without such a strategy, declining a genuine offer may not be justifiable, and in some cases, it could constitute a breach of fiduciary duty, regardless of whether the bidder aligns with the organization’s values or long-term vision.

Offense is the Best Defense: M&A is a Strategic Imperative for ESOPs

To meet this moment, employee-owned companies must lead with clarity, conviction, and a strategy for growth. For mature ESOPs with strong balance sheets, experienced leadership, and a growth mandate, acquisitions should be a core part of the strategic toolkit. M&A is no longer the exclusive domain of Wall Street—it is a critical lever for preserving the value and values of Main Street businesses in a consolidating economy. When pursued with discipline and purpose, M&A is not just a growth strategy but a way to strengthen and scale the company’s mission.

In this environment, playing defense is not enough. ESOP boards, trustees, and leadership teams must view growth through acquisition as an essential tool to create value and preserve and expand employee ownership. This requires developing a clear M&A strategy, building capacity to evaluate and execute deals, and identifying mission-aligned capital providers. A comprehensive acquisition strategy involves establishing acquisition criteria, conducting market outreach, and partnering with advisors who understand the unique needs and advantages of acquisitive employee-owned firms.

With a growing ecosystem of investors targeting the lower-middle market and unsolicited buyout offers on the rise, passivity is no longer a neutral stance — it’s a risk. For ESOPs, protecting independence and the sustainability of employee ownership requires action, including developing a comprehensive acquisition strategy. It is both a strategic imperative and the fiduciary duty of ESOP leaders — trustees, board members, and management — to act with foresight and urgency.

A focused acquisition strategy accomplishes three things: it creates value and scale, protects long-term independence, and capitalizes on a generational market opportunity.

Create value through scale: Strategic acquisitions allow ESOPs to increase revenue, expand into adjacent markets, and improve bargaining power with suppliers and customers. According to a 2025 NCEO article, “studies showed that 442 of the 467 acquisitions were considered successful, compared to the data that shows 50–80% of non-ESOP-related mergers fail to deliver positive results.”

For example, an ESOP-owned construction firm could acquire a specialty subcontractor to offer bundled services, increase margins, leverage overhead, and improve quality.

Protect long-term independence: As ESOPs grow more financially attractive, they can become targets for unsolicited acquisition offers. The best way to fend off a third-party bid and preserve long-term independence is through a comprehensive growth strategy.

Consider a mature ESOP-owned logistics company with strong cash flows and an aging management team — without a clear growth, talent acquisition, and succession plan, it may become vulnerable to financial or strategic acquirers.

Capitalize on a generational market opportunity: As thousands of business owners prepare to exit over the next decade, ESOPs offer a distinctive path forward, one that preserves legacy while broadening wealth-building opportunities for employees. Unlike traditional buyers, ESOPs combine financial competitiveness with a mission-aligned structure that transfers ownership to the very people who helped build the business. This makes them an increasingly attractive option for founders seeking both a fair price and a lasting impact.

An ESOP-led acquisition of a family-owned manufacturing business can offer the sellers fair price and market terms, while also preserving jobs, local roots, and shared values.

For ESOPs, M&A is both shield and sword — a way to protect independence, enhance competitiveness, and scale the promise of broad-based ownership in a dynamic economy.

Why ESOPs Win

In a crowded market where a growing range of investors are aggressively pursuing lower-middle market deals, ESOPs hold a powerful yet underutilized advantage. They have the ability to borrow the strongest traits from private equity—strategic focus, operational rigor, and access to capital—and pair them with the benefits of employee ownership to become the most competitive options for sellers. ESOPs are uniquely positioned to outperform all other buyer types for three key reasons:

1. Structural Cash Flow Advantages: ESOPs can often deliver better after-tax outcomes to sellers, especially when the target is organized as a C-Corp.  Further, ESOPs of companies that are organized as S-Corps pay no federal income tax on their share of profits, which leads to greater investable cash flow and the ability to make more competitive offers relative to private equity firms investing via fully taxable structures that also must accommodate high fees and incentive equity splits.
2. Long-Term Orientation: While many financial buyers operate with defined return horizons, often requiring a future transaction to realize returns within five to seven years, ESOPs offer the stability and continuity of perpetual ownership. Sellers can take comfort in knowing that an ESOP will be a long-term steward of their business. From an operational perspective, this allows the acquired company to focus on long-term value creation rather than disruptive short-term changes and financial engineering.
3. Cultural Alignment: In industries where relationships, reputation, and employee retention matter, ESOPs are more attractive acquirers. Employee ownership fosters loyalty and accountability, which leads to smoother integrations and more consistent performance. For founders and sellers who care about the long-term success of their people and communities, selling to an ESOP offers a path to preserve values, legacy, and independence.

To fulfill their potential, ESOPs must appreciate their own power. Their ability to offer competitive economics, long-term stability, and mission-aligned transitions is not a secondary advantage — it is a core part of their fiduciary obligation to grow, protect, and sustain employee ownership. Winning in this space requires understanding where ESOPs are strongest and building the capacity to act. The opportunity is real, and so is the responsibility.

Leveling Up ESOP M&A Capabilities

If M&A is a strategic imperative for ESOPs, then simply waiting for the right deal to appear is not enough. Every ESOP, regardless of size or sector, will benefit from a clear framework for executing on an M&A strategy. This framework doesn’t require immediate action, but it does require readiness. In a market defined by fast-moving capital and increasing consolidation, readiness is what distinguishes resilient companies from takeover targets.

Leveling up means building the internal and external capacity to source, evaluate, execute, and integrate acquisitions aligned with the mission of employee ownership. Here’s what that looks like in practice:

• Create an acquisition framework that reflects the organization’s strategic priorities, including ideal deal size, target sectors, cultural fit, and geographic reach.
• Establish a deal team of board members, executives, and key employees who understand the M&A strategy, can respond to inbound opportunities, and proactively pursue acquisitions that align with company culture and strategic goals.
• Partner with dedicated ESOP advisors,including M&A advisors, legal counsel, trustees, and valuation firms, who understand the nuances of employee ownership acquisitions and can source and structure deals that protect the ESOP trust and enhance long-term value.
• Build relationships with mission-aligned capital providers, including commercial lenders, impact investment funds, cooperative banks, and community development finance institutions (CDFIs) who understand ESOPs and can provide flexible financing to support acquisitions.

This shift requires more than technical skills; it demands a mindset shift. Boards and trustees must evolve from being stewards of the status quo to architects of future growth. Without the ability to act on high-quality acquisition opportunities, ESOPs may find themselves either outbid or left behind.

The time to prepare is now. A well-developed M&A framework gives ESOPs the tools to lead with confidence, act with discipline, and scale the impact of employee ownership in a consolidating economy.

Mike Brady is co-founder and Managing Director of 40 Million Owners, a corporate advisory firm exclusively focused on providing buy-side M&A services to ESOPs. Mike is also an Operating Partner at Southeast Acquisition Capital, a private equity firm focused on employee ownership buyouts.