New Data on ESOP Companies Acquiring Non-ESOP Companies

The NCEO has completed the most comprehensive review to date of publicly available information about ESOP companies purchasing non-ESOP companies. The review is consistent with anecdotal reports that buying other companies has become an important source of growth for closely held ESOP companies.

Since 2001, the NCEO has monitored press releases and a Google Alert news feed to maintain a list of M&A transactions in which an ESOP company buys another business. The list includes each acquiring company’s name and industry, as well as the target company’s name, industry (if different), and workforce size. The number of acquisitions reported in the public sources we tracked has roughly doubled in the last several years compared to the previous period.

In 2024, we did a comprehensive company-by-company search for acquisitions by ESOP companies from 2020 through 2024, looking at company websites as well as news sites and searching for information about any acquisitions the company might have done. We looked at every one of the largest 1,000 ESOP companies (as defined by the number of active participants reported in the acquiring company’s ESOP) and a random sample of 20% of the next 3,000 largest. 

We identified 827 acquisitions by the largest 1,000 ESOP companies from 2020 to 2024. Those acquisitions amounted to approximately 72,000 new employees who became employees of the ESOP acquirer. In addition, we identified 112 acquisitions among the 20% random sample from the 3,000 next-largest ESOP companies. Those acquisitions represented 4,800 employees, so if we assume that the 20% sample accurately represents the other companies in that size category, we estimate that these companies made 560 acquisitions representing 24,000 employees. We used this same estimating technique for all the numbers in this review. Although not all employees will be included in the ESOP and some of the employees of the target company may not remain employed by the acquiring company, this review gives an estimate for the growth of ESOP companies via acquisitions.

This study does not attempt to generate a complete review of all acquisitions by ESOP companies. Some acquisitions are never reported on any publicly available site. We cannot estimate just how many of these transactions we are missing. Our review also excluded public companies, banks, and ESOP companies with less than 50 active participants. Public company ESOPs tend to own a small percentage of their company’s stock. Most banks are also publicly traded, albeit sometimes very thinly. Private company bank ESOPs tend to own less than 25% of the shares, although there are a handful of exceptions. Because these companies are usually very different from the mostly 100% ESOP-owned companies doing the acquisitions, it seemed appropriate to exclude them. We do not claim that this analysis represents all acquisitions, but we are confident that these acquisitions represent the minimum boundary for the number of acquisitions by ESOP companies.

In short, we were able to specifically identify or estimate 1,387 acquisitions (827 + 560) that represent 96,000 employees (72,000 + 24,000) over a five-year period by the 4,000 largest ESOP companies. On an annual basis, that is an average of 277 acquisitions representing 19,200 employees per year. These are confirmed or conservatively estimated acquisitions only. There are undoubtedly other acquisitions our analysis could not find, although larger acquisitions tend to be reported.

Over a five-year period (between 2018 and 2022), the data collected by the Department of Labor on Form 5500 indicates that an annual average of 284 companies adopted new ESOPs, and those companies had an average of 40,195 active participants.

In other words, the acquisitions we were able to identify through public sources is significant. The number of new ESOP company employees (the large majority of whom are likely to become active participants in the plan) resulting from the acquisitions we identified equaled 48% of the number of plan participants created by newly created ESOP companies. 

If we assume the actual number of acquisitions and employees is somewhat higher, acquisitions currently add almost as many new employees to ESOPs as do new ESOPs each year. There are also at least somewhat more companies being purchased every year than new ESOPs are being created.

The tables below show the key characteristics of the acquisitions we reviewed. A few companies, most notably Integrity Marketing (an insurance marketing company that has grown to about 10,000 employees, largely through acquisitions), Terracon (engineering), Davey Tree (tree services), Higginbotham (insurance), Union Risk (insurance), and KCI (engineering) all were especially active acquirers.

Why ESOP Companies Make Acquisitions

The statutory authorization for S corporation ESOPs to own company stock starting in 1997 created the opportunity for 100% ESOP-owned S corporations not to owe any federal corporate income taxes. In addition, ESOP companies tend to perform better than other companies, adding an additional source of capital. Once these S corporation ESOPs repaid their acquisition debt, many found they had significant cash reserves. 

On the other hand, many business owners who want to sell their company find the opportunity to sell to an ESOP company highly attractive. They get a competitive price in most cases, they may get tax benefits, and their employees become owners of the acquiring company. That is a much more gratifying story for the sellers and the employees than what often happens in sales to competitors and especially in sales to private equity firms.

The NCEO has a book on using ESOPs for acquisitions, Acquisition Strategies for ESOP Companies. The NCEO’s Being Acquired by an ESOP Company toolkit will expand significantly in the coming months. We have also created an opportunity for NCEO member companies to add themselves to a directory indicating their interest in making acquisitions, and we will work with exit planners to make them aware of this opportunity.