A recent study, Governance Problems in Closely-Held Corporations, found that firms with shared ownership report a substantially larger return on assets and lower expense-to-sales ratios.

A major governance problem in closely-held corporations arising from the illiquidity of shares is the majority shareholders' expropriation of minority shareholders. As a solution, legal and finance research recommends that the main shareholder surrender some control to minority shareholders via ownership rights. We test this proposition on a large dataset of closely-held corporations. We find that shared-ownership firms report substantially larger return on assets (up to 14 percentage points) and lower expense-to-sales ratios. These findings are robust to institutionally motivated corrections for the endogeneity of the ownership structure. We are one of the first to provide evidence on the presence of governance problems and the effectiveness of shared ownership as a solution in settings characterized by illiquidity of ownership.

The article suggests that the solution is to surrender some control to other shareholders via ownership rights. While the study doesn't contemplate employee ownership, a great way to accomplish the shared ownership objective is via an ESOP. In addition to Using an ESOP as an Exit Strategy, ESOPs also Increase Employee Wealth and Wages and Provide Greater Employment Stability and Increase Job Satisfaction.

Selling to an ESOP in phases accomplishes the shared ownership objective while providing a ready market for an otherwise illiquid asset. It also provides the owner with diversification and liquidity while retaining control of the company. If desired (but not required), establishing an ESOP sets the stage for a gradual business transition.

If the sale is structured as a Section 1042 Sale, the seller can defer or avoid taxation on the gain.

The ESOP contributions and dividends that are used to fund the ESOP loan payments are tax-deductible. In addition, the portion of income attributable to an S corporation ESOP is not subject to federal income taxes (and in many cases state income taxes). The substantial tax savings will increase cash flow and can be used to retire the debt at a faster pace or be reinvested in the business.