Understanding ESOPs: A Strategic Approach to Business Liquidity

My mission at Wealth Formula Podcast is to provide you with real financial education.

You may have heard of something called the Dunning-Kruger curve. In short, when you start learning something new, you know that you don’t know anything. That’s the safe zone.

The dangerous part is what I call the red zone—when you’ve learned just enough to think you know a lot, but really… you don’t. Then, eventually, if you keep learning, you get to the point where you finally realize how little you actually know—and how much more there is to understand.

That’s kind of where I am now.

And so, the only thing I can do—and the only thing I encourage you to do—is to keep learning more than we knew yesterday.

Take this week’s episode.

We’re talking about Employee Stock Ownership Plans, or ESOPs.

Until recently, I didn’t fully understand how they worked. And I’d bet most business owners don’t either.

Which is exactly why this episode matters.

Even if you don’t currently own a business or a practice, I still think it’s important to learn about strategies like this—because someday you might. And in the meantime, you’re expanding your financial vocabulary, which is always a good investment.

So, what is an ESOP?

At its core, an ESOP is a legal structure that allows you to sell your business to a trust set up for your employees—usually over time. It’s a way to cash out, preserve your legacy, stay involved if you want to, and unlock some massive tax advantages in the process.

But before we talk about all the bells and whistles, let’s address the number one question that confuses almost everyone—including me:

Where does the money come from?

If you’re selling your company to a trust, and your employees aren’t writing you a check… how the hell are you getting paid?

Here’s the answer:

You’re selling your business to an ESOP trust, which is a qualified retirement trust for the benefit of your employees. That trust becomes the buyer. But like any buyer, it needs money.

So how does it pay you?

There are two main sources:

Bank financing – Sometimes, the ESOP trust can borrow part of the purchase price from a lender.

Seller financing – And this is the big one. You finance your own sale by carrying a note.

That means you get paid over time, through scheduled payments—funded by the company’s future profits. The company continues to generate cash flow, and instead of paying it out to you as the owner, it pays off the loan owed to you as the seller.

So yes—it’s a structured, tax-advantaged way to convert your equity into liquidity using your company’s own future earnings. You’re not walking away with a check on Day 1—but you are pulling money out of the business steadily and predictably, often with interest that beats what a bank would offer.

And here’s the kicker:

If your company is an S-corp and becomes 100% ESOP-owned, it likely pays no federal income tax, and often no state income tax either. That means a lot more money stays in the business—available to fund your buyout faster.

If you’re a C-corp, you might even qualify for a 1042 exchange, which can defer or eliminate capital gains taxes entirely if you reinvest the proceeds in U.S. securities.

And here’s something the experts probably won’t say out loud—but I will:

This isn’t always about selling your business.

Sometimes, it’s just a very clever way to get money out of your business and pay less tax.

You’ll hear ESOP consultants talk about legacy and succession planning—and that’s all true and valuable. But in reality, some owners use ESOPs as a pure tax play.

They stay in control, they keep running the business, and they simply create a legal structure that lets them pull money out tax-efficiently while rewarding employees along the way.

Think of it less like a sale and more like a smart internal liquidity strategy.

You still own the culture. You still drive the direction.

But you’re also getting paid—often better than private equity would pay you—and doing it on your terms, with serious tax savings.

Now, what if you actually do want to exit and walk away?

That works too.

If you’ve built a solid leadership team, you can sell the company to the ESOP, step back, and let them run it. Or the ESOP trust can sell the company later to a third party.

In fact, ESOP-owned companies often become more attractive to buyers because they tend to be profitable and well-run.

So ESOPs don’t limit your exit—they give you more ways to exit. On your terms.

Today on the show, I speak with Matt Middendorp, Director of ESOP Consulting at Vision Point Capital.

He works with business owners across the country to help them figure out whether an ESOP is the right move—and walks us through how the whole thing actually works.

This is complex stuff. That’s why it’s so important to hear it from someone who does this every day.