Retire Through Ownership Act: What the New ESOP Law Means for Founder Exits
The October 15 law gives ESOP trustees clearer rules for valuing private companies. Here is what changed, what did not, and how owners should prepare.
In this article 8 sections
The Retire Through Ownership Act, signed on October 15, 2026, lets employee stock ownership plan (ESOP) fiduciaries rely in good faith on independent valuations that follow IRS Revenue Ruling 59-60. It removes a long-running uncertainty for owners who want to sell to employees. It does not create a safe harbor from liability under federal retirement law.
For a founder nearing an exit, the law matters because most owners never get one. McKinsey projects about 6 million small and midsize businesses will face ownership transitions by 2035, and of roughly 510,000 businesses that left the market in 2022, 92% simply closed. This feature explains what changed, how an ESOP works in practice, what a real example looks like, and what to ask before you commit. It is for owners and operators of private companies. Upstart Wire covers entrepreneurship and strategy, and succession is where many good companies end. This is not legal or tax advice.
What does the Retire Through Ownership Act change?
The Act creates an ERISA framework for valuing privately held company stock inside an ESOP. ERISA is the federal Employee Retirement Income Security Act, the law that governs retirement plans. Under the new rules, ESOP fiduciaries can rely in good faith on independent valuations and business appraisers who follow IRS Revenue Ruling 59-60. It also addresses the question of "adequate consideration" for private company stock, which had no issued regulations.
The Senate passed the bill unanimously in October 2025, and the House passed it 401 to 14 on September 16, 2026. SHRM reported the details on its ESOP valuations explainer. Emily Rickard of Morgan Lewis told SHRM that a lack of clear standards on what counts as adequate consideration has historically stifled ESOP formation. James Bonham of The ESOP Association called it the most important ESOP law enacted in decades.
Read the caveat just as closely. Rickard cautioned that the law does not create a safe harbor from ERISA liability for valuation decisions, and it does not let an appraisal replace the fiduciary process. Courts and the Department of Labor will shape how "good faith reliance" is applied. That means a founder and the plan's trustees still need a careful process, not just a report.
Why does succession matter so much for small businesses?
Because the default outcome is closure. Fortune reports that, of about 510,000 businesses that exited the market in 2022, McKinsey found 92% closed, 5% were sold, and 3% were transferred to new owners. Cerulli Associates expects about $124 trillion in wealth to pass down through 2048, with roughly $79 trillion from baby boomers and older generations.
Family transfer is also uncertain. A 2026 Bank of America study found 23% of wealthy business owners inherited their companies, compared with 11% who bought them. For owners without a child who wants the business, the options are a sale to a competitor, a sale to private equity, a sale to a manager, or a sale to employees. Each has trade-offs in price, speed, and what happens to the people who work there.
If you are weighing a sale to an outsider, compare it with buying and starting paths too. Our guide on buying or starting a business with SBA acquisition loan rules shows the other side of the same transaction, since many buyers fund deals with that debt.
How does an ESOP work for an owner and the employees?
An ESOP is a retirement plan that holds company shares in a trust for participating employees. Employees get a retirement benefit tied to the company's performance, and it costs them nothing out of pocket. When an employee leaves, the company buys back the vested shares. The employee can roll the money into a retirement account or take it in cash.
Newport Restaurant Group offers a concrete example. It owns The Mooring and 17 other restaurants and hospitality venues in Rhode Island and Massachusetts. It began as a fuel oil business in 1925, sold its other assets, and started its ESOP in 1995. It is now 100% employee-owned, with about 1,100 employee-owners, rising to roughly 1,800 workers in summer.
The numbers show what a plan looks like in practice. Newport has paid $33 million to employee-owners since 1995. Employees fully vest after six years of service, and they need 800 hours a year, about 15 hours a week, to participate. CEO Mick Lamond joined as CFO in 2005 and became CEO in 2025, which shows succession inside the company. He calls ESOPs a proven model for founder succession and a good way to keep jobs in the community. Fortune's profile of Newport has the full story.
What does an ESOP exit cost you compared with other options?
The trade is price and speed against continuity and culture. An ESOP sale is financed by the company and the plan over time, so you may not receive all the proceeds on day one. A strategic buyer may pay more up front but could close your office or cut staff. Fortune notes private equity firms invested in more than 21,000 U.S. businesses in 2025, about 85% with fewer than 500 employees, so that route is common and competitive.
Employee ownership can also produce large payouts. When KKR sold CoolIT Systems to Ecolab, frontline employees received checks averaging $240,000, according to Fortune. Fortune ties that payout to a private equity sale rather than a classic ESOP, but it shows how broad ownership can reach the workforce.
Look at what other founders do when they leave, too. Our piece on founder CEO exits and succession lessons from 2026 covers handoff mistakes that apply to any exit path, including an ESOP.
What should you do before you consider an ESOP?
Start with a readiness check. An ESOP works best for a profitable company with stable cash flow, a management team that can run without you, and enough payroll to support a plan. A company that depends on one founder relationship or has erratic earnings will struggle to fund share repurchases over time.
- Hire ERISA counsel who has set up ESOPs, plus a tax advisor who knows your entity type.
- Engage an independent appraiser who follows Revenue Ruling 59-60, and keep a record of how the trustee reviewed the report.
- Model the repurchase obligation, because the company must buy back shares as employees leave.
- Decide who runs the business after you, and start training them now.
- Plan financing for the sale, since proceeds often arrive over time.
Financing is its own project. Our explainer on why most small business loans get rejected lists the document gaps that sink applications, which helps if your deal needs bank debt. And before any of this, get your books in order. A clean set of financials makes every valuation conversation easier.
When is an ESOP the wrong choice?
An ESOP is a poor fit when the business is too small to carry plan costs, when earnings swing widely from year to year, or when the owner needs the full sale price immediately. It is also a poor fit if no one inside the company can take over management. A plan can transfer ownership, but it cannot create a successor.
Other options may serve you better in those cases. A sale to a single manager, a partial sale that keeps you involved for a few years, or a sale to a competitor can all work, depending on your goals. Write down what you want most: price, speed, jobs, legacy, or a clean break. Rank them. The ranking will usually point you toward one path and away from the others.
Ask each advisor the same three questions. What does the process cost, and who pays? How long does it take from first meeting to closing? What happens to employees and customers in the first year? Compare the answers side by side before you pick.
What are the main risks?
The first risk is process. Because the law keeps fiduciary duties in place, a rushed valuation or a trustee who rubber-stamps an appraisal can create liability. Watch litigation and Department of Labor activity, as Rickard advises, since those will define how good faith reliance works.
The second is cash. A successful ESOP creates a repurchase liability that grows as the company's value grows and as employees retire. A company that hits a downturn can face a squeeze. The third is culture. Ownership changes expectations, and employees will want information and a voice. At Upstart Wire, we would plan for that transparency from the start.
Conclusion
The Retire Through Ownership Act does not make an ESOP easy. It makes the valuation question clearer, which has been one of the biggest barriers for private companies. For owners who want their business to outlast them and keep local jobs, that is a real change.
If you are within ten years of exit, take one step this month: ask an ESOP-experienced attorney for a one-hour readiness review. Bring three years of financials and a list of who could run the company without you.
