Independent Buyout (IBO)

An Independent Buyout (IBO) lets you leverage government-backed structures and incentives to buy out your shares - essentially a tax-free leveraged buyout of your own company.  By combining:

By combining:

An IBO creates a powerful alternative for business owners: the ability to achieve liquidity, capture tax benefits, and maintain independence - all without handing the reins to outside investors.
Use the same sophisticated financial techniques Private Equity (PE) firms use to purchase a portion or all of your ownership but without the PE firm.

The foundation for IBOs dates back to 1974, when Congress created the ESOP—along with a suite of tax incentives—to encourage employee ownership while rewarding selling shareholders. These laws allowed business owners to sell shares to employees through an ESOP structure while receiving significant tax advantages. When combined with modern financing tools, rollovers, and additional government programs, the structure evolved into what we now call an Independent Buyout (IBO): a contemporary, tax-advantaged alternative to selling to private equity.

An IBO uses an ESOP’s ability to borrow money to purchase company stock from existing shareholders. The transaction is typically financed through external lenders and seller notes—employees contribute nothing out of pocket. This structure enables business owners to achieve immediate liquidity through a leveraged buyout of their own company, but in a far more tax-efficient way than a traditional sale.

Through the §1042 Rollover, selling shareholders can defer or even eliminate capital gains taxes. The proceeds from the sale are reinvested within 12 months into Qualified Replacement Property (QRP), which allows them to defer paying capital gains tax indefinitely. If those QRP assets are held until death, the deferred gains are permanently erased due to a step-up in basis for heirs. Sellers can even use leverage—typically investing only 25% down—so they retain the majority of their sale proceeds in cash while still meeting the rollover requirements.

Qualified Replacement Property can include a variety of active investments such as self-storage, apartments, or low-income housing. Because QRP purchases generally require only about 25% down, sellers can keep most of their sale proceeds liquid. This not only diversifies their holdings into real assets but also provides potential appreciation through leveraged growth. If held until death, the assets receive a full step-up in basis, meaning heirs owe no capital gains tax on inherited property.

An IBO lets current leadership maintain complete control of the company. There are no outside investors, strategic buyers, or private equity firms dictating terms or taking board seats. Management and ownership continue to make all operational and strategic decisions, ensuring that the company’s culture, vision, and autonomy remain intact.

Sellers don’t have to sell 100% of their shares in an IBO—they can choose to sell as little as 30%, achieving liquidity while keeping a meaningful stake in the business. A second sale can occur years later, often at a higher valuation, providing another liquidity event sometimes called the “second bite of the apple.” Additionally, warrants issued at today’s valuation allow sellers to share in future company growth without further investment—offering a potential second, larger payday.

In an ESOP-based buyout, the company can deduct both the principal and interest payments used to purchase the shares—something not possible in most other acquisitions. This allows the business to make payments with pre-tax dollars, effectively doubling after-tax cash flow and enabling faster debt repayment and reinvestment. Since the government incentivizes these structures, lenders are often more willing to finance them, recognizing the built-in tax benefits.

Once a company becomes 100% ESOP-owned, it pays zero federal and zero state income tax. The profits that would normally go to the IRS instead remain within the business through the tax-exempt ESOP trust. This structure significantly enhances cash flow, allowing for rapid debt reduction, reinvestment in growth, and a stronger balance sheet. Management or investors can also hold warrants to capture additional upside as the company expands.

For companies operating under cost-plus contracts, ESOP contributions and dividends are fully reimbursable expenses. This means the U.S. government effectively repays the ESOP’s entire purchase price—including both principal and interest—while the company continues to earn its standard profit margin. After the transaction, the company’s tax-free status creates unparalleled cash flow and reinvestment capacity, making this structure uniquely powerful for government contractors.

Under an ESOP, employees receive annual share allocations based on their share of total payroll, gradually building real ownership in the company. Typically, ownership vests 20% per year after the second year, reaching full vesting by year six. When employees leave, their shares return to the plan and are reallocated to active team members, keeping ownership within the workforce. This model ties employee wealth directly to company performance—boosting engagement, retention, and loyalty. In fact, ESOP companies report retention rates nearly 300% higher than their non-ESOP counterparts.