The Case for Incentivising Employee Ownership Buyouts

The New York Times reported this year that private equity firms are now sitting on 33,575 unsold businesses, up from 32,451 at the end of 2025 and roughly 15,923 a decade ago. Buyers and sellers can't agree on price, holding periods are stretching well past what these funds were built for, and a growing number of businesses are stuck in a kind of ownership limbo — bought with one exit in mind, going nowhere.

Most of that specific backlog is large, private-equity-owned companies: software businesses bought at 2021 valuations, waiting out a gap between what a buyer will pay today and what the fund needs to show its own investors. That's not really who employee ownership is for. But it's the number that makes a much bigger, more everyday problem impossible to ignore. Business owners across the size spectrum are approaching their own exit with a narrow set of options in mind — sell to a competitor, sell to private equity, or wind the business down — while the buyer sitting closest to it, the people already running it day to day, is almost never seriously put on the table.

The backlog isn't the real target here. It's the wake-up call. The exit route that keeps getting overlooked underneath it is the one worth fixing.

The US Already Built the Incentive. It Just Isn't Using It.

Under Section 1042 of the US Internal Revenue Code, an owner who sells at least 30% of their company to an Employee Stock Ownership Plan, or ESOP, can defer capital gains tax entirely by reinvesting the proceeds into qualifying replacement investments. Hold that replacement investment until death, and the gain can be eliminated altogether. That's about as generous as the tax code gets for a business sale, anywhere.

And it's barely used relative to the scale of the problem sitting in front of it. Not because the incentive is weak — because most owners, and the advisors sitting next to them, default straight to a broker and a private equity process without ever putting an employee-ownership sale on the table as a real alternative.

The UK Just Made Its Version Weaker, at the Worst Possible Time

The UK has its own equivalent: the Employee Ownership Trust, or EOT. Sell a controlling stake of your business to an EOT and, until recently, you paid zero capital gains tax on the sale. From the end of November 2025, that relief was cut from 100% down to 50%, after the government said it was on track to cost around £2 billion a year against original estimates of under £100 million.

That reasoning wasn't unreasonable on its own terms. Around half of the relief was going to the largest 10% of disposals — meaning a full tax exemption was subsidising very large exits, not just the small-business succession stories the scheme was originally sold on. Cutting it was a response to a real design flaw, not an arbitrary swing against employee ownership.

But cutting the relief in half for everyone is a blunt way to fix a targeting problem. It didn't make the incentive better aimed. It made it weaker across the board — including for the smaller, owner-operator sales it was actually built for in the first place.

So at the exact moment employee ownership looks more relevant than it's been in a decade, the UK weakened the incentive instead of pointing it more precisely at the businesses it was meant to serve. Two governments, two versions of the same idea, and neither one properly sized for the problem in front of it.

This Isn't Only a Tax Question. It's a Social One.

An employee-ownership sale doesn't just move a company from one balance sheet to another. It keeps the people who actually built the business invested in what happens to it next, instead of handing it to a buyer optimising for a five-year hold and an exit multiple. That's loyalty and long-term thinking built directly into who owns the company — not a value someone writes into a mission statement afterward.

If the tax system is going to favour some outcomes over others — and it already does, every time it sets a capital gains rate — it should favour the exit route that keeps employees, and the long-term interests of the business, in the room. Right now, neither country's incentive is sized to actually do that.

The UK Issue

The UK's mistake wasn't offering zero capital gains tax. It was offering it with no limit, so the largest disposals ended up absorbing half the benefit meant for owner-operators. The better fix isn't a smaller number across the board — it's keeping the incentive at zero and aiming it properly: full relief up to a meaningful deal-value threshold, aimed squarely at the businesses this was always meant to serve, tapering off above it so it can't quietly be captured by the largest sellers again.

Perhaps the honest answer is no capital gains tax at all on a genuine employee-ownership sale, at the size this was built for. Not a flat relief anyone can max out regardless of deal size, but a clear, permanent, well-aimed signal that this is the outcome the tax system actually wants to see.

About Me

I'm Michael Philippou, co-founder of Big Love, a plant-based ice cream business in Santa Monica that I've been running with my wife Victoria for over ten years. Before ice cream, I was a lawyer. I write about the real, unpolished lessons of running a small business — no gurus, no hype, just what's actually worked and what hasn't. Watch more on YouTube (Real Business Real Lessons) or follow along on LinkedIn.