Business succession is the largest economic development risk most states are not yet managing.
The United States is entering the largest transfer of business ownership in its history. Roughly 6 million small and medium-sized businesses will change hands by 2035 as their baby boomer owners retire; more than 1 million of them are viable candidates for sale, holding as much as $5 trillion in enterprise value. The default outcome is not a sale but outright closure: of the roughly 510,000 small businesses that exited the market in 2022, 92 percent closed outright and just 5 percent were sold. Every closure takes with it jobs, the state’s tax base, supplier relationships, and productive capacity that no business attraction strategy can win back. Business succession is the largest economic development risk most states are not yet managing.
Employee ownership is a proven response built precisely for this exposure. Five decades of evidence show that employee-owned firms grow faster, lay off fewer workers in downturns, default less often, and build substantial retirement wealth for workers who contribute no capital of their own, all while keeping ownership and decision-making anchored in the communities where these firms operate. The model has advanced under Republican and Democratic presidents and governors alike. And yet it remains rare, with roughly 6,500 ESOPs nationwide and new plan formation averaging just 269 per year for a decade.
The growth of employee ownership is constrained in part by a lack of access to capital.1 Because employees bring no capital of their own to an employee ownership transaction, a sale to them must be financed against the company's own cash flow, and in the status quo, the gap between what a lender will provide and the purchase price falls to the seller, who takes back a deeply subordinated note and waits years to be paid. Compared to a strategic or financial buyer paying the full price at closing, that is not a competitive value proposition. Employee ownership finance policy therefore has two objectives that must be pursued together: give the selling owner liquidity on par with any other buyer and minimize the cost of capital to the employee-owned firm.
As states consider the right toolkit to expand employee ownership, they do not need to invent anything.
In 1976, a federal Economic Adjustment Assistance grant to New Jersey was re-lent by the state's development finance authority to the employees of the Okonite Company; the loan was repaid, the fund revolved ninefold, and Okonite remains 100 percent employee-owned today. On September 4, 2026, New Jersey returned to that model: Governor Mikie Sherrill signed legislation (P.L.2026, c.83) directing NJEDA to establish an Employee Ownership Transition Program and a dedicated Employee Ownership Revolving Loan Fund, capitalizable from state appropriations, federal funds, philanthropic capital (whether grants or recoverable investments such as PRIs), and the Authority’s own program revenue. This playbook outlines how to build that capacity with better tools than 1976 had: a federal authority expressly written for the purpose, a maturing private market of specialized employee ownership funds, and five decades of evidence on how these companies perform. It outlines a state finance toolkit composed of four complementary instruments: transaction-level capital, credit enhancements and cost-of-capital tools, institutional capital mobilization, and tax incentives.
Around the toolkit, the playbook specifies what a working program requires: the non-state financing tools that complete the capital stack; capitalization sources matched to the instruments each can lawfully fund; the institutional capacity to run the program, anchored by a Director of Employee Ownership and an advisory commission; the ecosystem that generates a pipeline of viable transitions; and an implementation roadmap that begins with administrative action states can take now and sequences toward a durable legislative core.
The diffusion of artificial intelligence across the American economy makes the case for this kind of investment even more urgent. The small and medium-sized firms approaching ownership transitions are the same firms whose margins AI adoption stands to expand over the coming decade, and in a conventional firm those gains can come at the expense of the workers themselves. In an employeeowned firm, where the distinction between capital and labor collapses, employee owners hold the capital claim: productivity gains flow into their ESOP accounts rather than to an outside investor, and the firm has a structural incentive to deploy technology in ways that augment its workforce rather than replace it.
The succession wave will not recur at this scale for a generation, and it will resolve either by default or by design. The states that build this capacity will retain their anchor businesses, broaden ownership, and help decide who owns the next era of American enterprise.
Sources
Source numbering follows the full playbook.
- The ESOP Association, "Access to Capital: A Barrier to ESOP Creation" (Washington, DC: The ESOP Association, May 9, 2025).