Two Very Different Roads to Owning a Business
If you’re exploring ways to acquire or take ownership of a business, you’ve likely encountered two distinct paths: Employee Stock Ownership Plans (ESOPs) and SBA-financed acquisitions. While both result in a change of ownership, they differ dramatically in structure, tax treatment, financing, and who ends up owning the business.
At GoSBA Loans, we’ve facilitated over 126 SBA acquisition deals and more than $320 million in funding in 2025. We regularly help buyers evaluate their options — including whether an ESOP or SBA acquisition is the right fit for their situation. This guide breaks down both paths so you can make an informed decision.
What Is an ESOP and How Does It Work?
An Employee Stock Ownership Plan (ESOP) is a qualified retirement benefit plan that invests primarily in the stock of the sponsoring employer. In practical terms, it’s a mechanism for transferring business ownership to employees — collectively, not individually.
How ESOPs Are Structured
- Trust formation: The company establishes an ESOP trust, which is a separate legal entity that holds company stock on behalf of employees
- Stock purchase: The ESOP trust purchases shares from the existing owner(s), funded by company contributions, borrowings, or a combination
- Allocation: Shares are allocated to individual employee accounts based on a formula (typically compensation-based or equal allocation)
- Vesting: Employees earn ownership rights over time through a vesting schedule (typically 3-6 years)
- Distribution: When employees leave or retire, their shares are repurchased by the company or the ESOP trust at fair market value
Key Characteristics of ESOPs
- Collective ownership: No single employee typically owns a controlling interest. Ownership is distributed across all eligible employees.
- Retirement benefit: ESOP participation functions as a retirement plan — employees receive the value of their shares when they leave or retire
- Ongoing company obligation: The company must make annual contributions to the ESOP and repurchase shares from departing employees
- Board governance: While employees own shares, the ESOP trustee typically votes the shares. Day-to-day management usually continues as before.
- Complex and expensive to establish: ESOP setup costs typically range from $50,000 to $150,000+ in legal, appraisal, and administrative fees
- Annual administration: Ongoing annual costs of $20,000-$50,000+ for administration, appraisals, and compliance
What Is an SBA Acquisition?
An SBA acquisition is a straightforward business purchase financed through an SBA-guaranteed loan (typically the SBA 7(a) program). An individual buyer — or a small group of buyers — purchases the business from the current owner.
How SBA Acquisitions Work
- Buyer identification: An individual or small partnership identifies a business to purchase
- Financing: The buyer secures an SBA 7(a) loan, typically covering 75-90% of the purchase price
- Equity injection: The buyer provides 10-20% of the purchase price as a down payment
- Seller financing: Often, the seller carries a note for 10-20% of the purchase price (on standby behind the SBA loan)
- Closing: Ownership transfers to the buyer upon closing, with a transition period from the seller
- Repayment: The buyer repays the SBA loan over 10-25 years from business cash flow
Key Characteristics of SBA Acquisitions
- Individual ownership: One person (or a small group) owns and controls the business
- Full control: The buyer makes all operational and strategic decisions
- Personal guarantee: The buyer personally guarantees the SBA loan
- Clean transaction: Ownership transfers completely at closing — no ongoing obligations to a trust
- Relatively simple: While still complex, SBA acquisitions are significantly simpler and less expensive to execute than ESOPs
- Lower setup costs: Legal and closing costs are typically $10,000-$30,000, depending on deal size
Key Differences: ESOP vs. SBA Acquisition
Let’s compare these two paths across the dimensions that matter most:
Ownership Structure
- ESOP: Collective employee ownership through a trust. No single person controls the company through stock ownership. Management is typically appointed by a board or trustee.
- SBA: Individual (or small group) ownership. The buyer has full control and decision-making authority.
Who Initiates the Transaction
- ESOP: Typically initiated by the selling owner as a succession strategy. The owner decides to sell to employees rather than an outside buyer.
- SBA: Initiated by the buyer. An entrepreneur seeks out a business to purchase.
Financing
- ESOP: Funded through company cash flow, bank loans to the ESOP trust, or seller financing. The company (not an individual) takes on the debt.
- SBA: Funded through an SBA-guaranteed loan to the individual buyer, supplemented by the buyer’s equity injection and often seller financing.
Cost and Complexity
- ESOP: High setup costs ($50K-$150K+), ongoing annual administration ($20K-$50K+), annual independent appraisals, ERISA compliance requirements, and potential repurchase obligation liability.
- SBA: Lower transaction costs, simpler structure, and no ongoing trust administration requirements.
Risk Profile
- ESOP: Risk is spread across employees as a group. No individual puts up personal capital. However, employees’ retirement savings are concentrated in one company’s stock — a significant concentration risk.
- SBA: Risk is concentrated on the individual buyer, who provides a down payment and personal guarantee. However, the buyer has full control to manage that risk.
Tax Advantages of Each Path
Both ESOPs and SBA acquisitions offer significant tax benefits, but they work very differently.
ESOP Tax Advantages
- Section 1042 rollover (C-corps): If the ESOP purchases at least 30% of the company’s stock, the selling owner can defer capital gains taxes by reinvesting in qualified replacement property
- S-corp ESOP benefit: The portion of an S-corp owned by the ESOP is exempt from federal income tax. A 100% ESOP-owned S-corp pays zero federal income tax.
- Deductible contributions: Company contributions to the ESOP (including loan principal payments) are tax-deductible
- Employee benefit: Employees pay no tax on ESOP contributions until they receive distributions
SBA Acquisition Tax Advantages
- Interest deduction: All interest paid on the SBA acquisition loan is tax-deductible as a business expense
- Asset step-up: In an asset purchase (most common SBA structure), the buyer receives a stepped-up tax basis in all assets, enabling depreciation and amortization deductions
- Goodwill amortization: Goodwill and other intangible assets are amortized over 15 years under Section 197, creating significant annual tax deductions
- Section 179 and bonus depreciation: Tangible assets can often be expensed immediately or depreciated on an accelerated schedule
- Operational deductions: As the business owner, all legitimate business expenses reduce taxable income
When Does Each Path Make Sense?
An ESOP May Be Right When:
- The selling owner wants to reward long-term employees with ownership
- There’s no obvious individual buyer for the business
- The business is large enough to absorb ESOP costs (generally $5M+ in revenue)
- The owner wants to maintain the company culture and legacy
- Tax optimization is a primary goal (especially for S-corps)
- The seller wants to transition gradually rather than exit completely
- Employee retention is critical and the ESOP serves as a powerful retention tool
An SBA Acquisition Makes Sense When:
- An individual entrepreneur wants to own and operate a business
- The buyer wants full control over strategic direction
- The business is too small for an ESOP to be cost-effective (under $3-5M in revenue)
- The buyer has relevant industry experience and a clear vision for the business
- Speed matters — SBA acquisitions close in 60-120 days vs. 6-12 months for ESOPs
- The buyer wants to build personal equity and wealth through business ownership
- Simplicity is valued — SBA acquisitions have far less ongoing administrative burden
Why Most Individual Buyers Choose SBA Over ESOP
While ESOPs are a fantastic tool for the right situation, the reality is that most individual business buyers choose the SBA acquisition route. Here’s why:
- Control: Entrepreneurs want to own and control their business. ESOPs distribute ownership and dilute individual control.
- Simplicity: SBA acquisitions are significantly simpler to execute and maintain. No trust administration, no annual appraisals, no ERISA compliance.
- Personal wealth building: SBA buyers build equity in the business and benefit directly from its growth. ESOP participants benefit through retirement distributions.
- Size constraints: Most businesses on the market are too small for ESOPs to be practical. The fixed costs of ESOP administration require a minimum business size to be economical.
- Speed: SBA deals close faster, which matters in competitive deal environments.
- Buyer’s perspective: If you’re the one initiating the acquisition — searching for, evaluating, and negotiating to buy a business — you’re almost certainly an SBA buyer, not an ESOP candidate.
Can You Combine ESOP and SBA Elements?
In some cases, creative deal structures can incorporate elements of both approaches:
- Buy now, ESOP later: An individual acquires the business via SBA loan and later establishes an ESOP as a succession and retention strategy
- Partial ESOP: The seller sells a portion to an ESOP and a portion to an individual buyer
- Employee equity programs: While not a formal ESOP, SBA buyers can offer key employees equity stakes, profit sharing, or phantom stock to align interests
These hybrid approaches require careful legal and tax planning, but they can offer the best of both worlds in the right circumstances.
GoSBA Helps You Find the Right Path
At GoSBA, we don’t just process SBA loans — we help entrepreneurs evaluate their options and structure the best deal for their specific situation. Our experience across 126+ closed deals means we’ve seen virtually every deal structure and can help you think through the implications of each approach.
Here’s what we bring to the table:
- 50+ lender network: If SBA financing is the right path, we’ll match your deal with the ideal lender
- Free business plan and projections: Worth $2,500-$5,000, our complimentary projections help you evaluate the financial viability of any acquisition
- Deal structure expertise: We help you think through asset vs. stock purchase, seller financing, transition terms, and more
- Completely free service: We’re compensated by lenders upon successful closing — our service costs you nothing
Whether you’re leaning toward an SBA acquisition, exploring an ESOP, or still figuring out which path is right for you, we’re here to help.
Contact GoSBA today for a free consultation — let’s discuss your goals and find the right ownership path for your situation. No cost, no pressure, just expert guidance backed by $320M+ in closed SBA deals.
