Private Equity vs. Employee Ownership: Which Exit Strategy Actually Pays Contractors More?

Short answer:  For many contractors and construction owners, a sale to an ESOP will generate greater total wealth than a private equity transaction. This is due to the unique tax benefits available in an ESOP sale as well as the opportunity for sellers to capture a “second bite of the apple” which provides a future liquidity event for the sellers. While private equity may offer a path to exit, employee ownership typically produces stronger long-term financial outcomes for the owners and avoids a disruptive transition of control.

The $10 Million Question Construction Owners Are Asking

At first glance, this feels simple.

If private equity offers $10 million, and an ESOP offers $10 million, then the outcomes should be the same… right?

Not exactly.

Exit value isn’t just about the headline number. It’s about:

• What you keep after taxes
• How much risk you’re taking post-sale
• Whether you retain operational control
• And what your ownership stake can still become over time
  
  

When you compare private equity and employee ownership side by side, the math, and the story, start to look very different.

Let’s start with a simplified, apples-to-apples comparison. These numbers are illustrative and will vary by structure and tax situation, but the pattern is what matters.

Private Equity Exit: $10M Offer

Typical characteristics:

• Majority or full sale
• Loss of operational control
• Earn-outs or rollover equity common
• Capital gains taxes triggered at sale

Example outcome:

• Sale price: $10,000,000
• Estimated taxes (federal & average state capital gains): ~$3,000,000
• Net proceeds: ~$7,000,000

In many PE deals, a portion of the value is also tied to future performance through earn-outs or rolled equity, meaning not all value is guaranteed. Sellers lose control and become accountable to the PE buyers.

ESOP Transaction: $10M Valuation

Typical characteristics:

• Sale of shares for fair market value plus a stake in future equity
• Owner retains operational control
• Employees receive equity over time as a competitive employee benefit

Example outcome:

• Transaction value: $10,000,000
• Capital gains tax avoidance (saves $3,000,000)
• Second bite of the apple - a significant equity stake used to create an additional future payout to sellers
• Net proceeds: $10,000,000 + the second bite of the apple

A properly structured ESOP delivers greater net-of-tax wealth to sellers.

Where the “Second Bite of the Apple” Changes the Math

This is where the private equity and ESOP paths truly diverge, and where the idea of the second bite of the apple is a game-changer.

In a private equity transaction, most business owners experience a single liquidity event. Once the deal closes, the majority of value is realized upfront, often with some portion tied to earn-outs or rollover equity that depends on performance the owner may no longer control. In practical terms, the exit is largely one-and-done.

An ESOP works differently.

In an ESOP transaction, owners realize the wealth outcome described while retaining operational control and a meaningful ownership stake in the company.

As the business continues to grow under stable leadership, that retained equity may be sold typically at a higher valuation due to continued growth and improved performance. Again, this future liquidity event is referred to as the second bite of the apple.

In other words, the second bite isn’t just about future potential. It results in a second payout to sellers.

When you factor this into a five-year horizon, the financial picture often shifts. While a $10M private equity offer may deliver a single after-tax outcome, a $10M ESOP transaction can produce:

• Competitive or better after-tax proceeds upfront
• Continued income and leadership involvement
• And a second liquidity event that increases total wealth over time

For owners who plan to stay involved and continue building the business, the ESOP path isn’t just an exit strategy - it’s a staged wealth building strategy that outperforms a traditional sale.

The 5-Year Wealth Comparison Most Owners Never See

The biggest difference shows up after the transaction.

Private Equity: 5 Years Later

• Owner typically exits day-to-day operations and/or is subject to oversight by the buyer
• Limited control over future decisions
• Upside depends on rollover equity performance
• Cultural and operational changes often follow

Total wealth is largely capped at the initial transaction plus whatever the secondary equity produces, if targets are met.

ESOP: 5 Years Later (With Continued Involvement)

This is where the second bite of the apple comes into play.

• Owner retains operational control
• Business continues to grow under familiar leadership
• Remaining ownership stake increases in value
• Additional liquidity events may occur later
• Company becomes Employee Owned, aligning employee interests with the company

Why “Who Pays More?” Is the Wrong Starting Point

The better question isn’t: Which option pays more upfront?

It’s: Which option pays more when you account for taxes, risk, control, and long-term value?

For many business owners, employee ownership is the clear winner.

Frequently Asked Questions

Q. Does private equity always pay more than an ESOP?
No. ESOPs transact at fair market value and typically provide better after-tax outcomes than private equity.

Q. Are ESOPs riskier than PE exits?
Transaction risk with an ESOP is lower than a PE transaction as sellers can structure, negotiate and close a transaction quietly and confidentially without committing to extreme due diligence and an adversarial negotiation typical in a PE deal.

Q. Can I stay involved after an ESOP transaction?
Yes. Owners frequently retain operational control and continue leading the business.

Q. Is the “second bite of the apple” real?
Yes. Continued ownership and business growth can significantly increase total wealth over time.

Q. Which option is right for me?
It depends on your goals, timeline, leadership team, and desire for control, but ESOPs deserve serious consideration earlier than most owners think.