Preserving independence and building wealth via an ESOP

As consolidation continues to reshape the health landscape, physician practice leaders face a dilemma: how to unlock the financial value of their business without sacrificing the clinical autonomy and culture that define it.

For many, the default paths are well-trodden — selling to a private equity (PE) firm or integrating with a hospital or health system. But in his 2025 MGMA Summit presentation, Imran Javaid, Managing Director at BMO, made the case for a third option that blends ownership transition with cultural preservation: the Employee Stock Ownership Plan (ESOP).

“An ESOP is really a retirement plan that owns stock in the company,” Javaid explained. “It's a qualified plan. The company contributes money to the plan, which is held in trust, and then over time, those shares get allocated to employees based on payroll.”

Unlike the more transactional nature of PE deals, ESOPs offer a structured, values-aligned alternative, allowing physician owners to monetize their equity while cultivating long-term stability and employee investment in the organization’s future.

Demystifying the ESOP structure

In simple terms, an ESOP is a retirement plan governed by the Employee Retirement Income Security Act (ERISA) that holds company shares on behalf of employees. But functionally, it operates more like a leveraged buyout.

“The company will borrow money, either from a bank or the selling shareholders. That money will go to the trust, and then the trust will pay the shareholders,” Javaid said. “That’s how the transaction gets executed.”

Unlike external sales, which often transfer full control, an ESOP allows the business to remain independent, while gradually distributing ownership internally. This structure offers several key advantages:

• Tax benefits: ESOP-owned companies can elect S-Corp status, avoiding federal income taxes on profits attributable to the ESOP-owned portion. This creates a powerful cash flow advantage, ideal for capital reinvestment or debt servicing.
• Retention and engagement: Employees become beneficial owners, which can boost accountability, morale, and long-term retention.
• Legacy protection: Founding or senior physicians can exit financially while ensuring the organization’s mission and culture remain intact — without handing the reins to outside entities with different priorities.