Raymond James launches new ESOP advisory practice

Raymond James is expanding its investment banking capabilities with the launch of a dedicated employee stock ownership plan (ESOP) advisory practice aimed at helping privately held companies navigate ownership transitions.

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The firm said the new ESOP advisory group will operate within its investment banking division and will focus on structuring and executing tax-advantaged ownership transfer strategies for privately owned businesses. The unit will also support Raymond James advisors working with business-owner clients evaluating ESOP transactions.

To lead the effort, Raymond James hired Mark Buchanan as managing director and head of ESOP advisory. Buchanan joins from advisory firm Stout, where he spent three years building and leading its ESOP investment banking capabilities. He previously held investment banking roles at Macquarie Capital, BMO Harris Bank and Credit Suisse.

In his role, Buchanan will oversee ESOP-related mergers and acquisitions activity for the firm’s institutional clients. He will also work alongside financial advisors and their business-owner clients exploring ESOPs as a succession planning or liquidity strategy.

“I have had the great pleasure of serving business owners as well as employee owners in solving unique challenges, particularly surrounding growth, succession planning and monetization,” Buchanan said in a statement. “With Raymond James now offering ESOP advisory services to complement its comprehensive suite of services for business owners, I look forward to building the practice and helping clients and their employees grow wealth in a meaningful way.”

READ MORE: How ESOPs and 1042 rollovers are reshaping RIA succession plans

The playing field for ESOP offerings

Compared to private equity acquisitions, ESOPs are still relatively rare. But the number of firms offering ESOP-related services is on the rise.

According to data from the National Center for Employee Ownership (NCEO), a nonprofit organization focused on supporting the employee ownership community, there are more than 350 U.S. businesses offering ESOP-related services.

According to Raymond James, the new practice will help family-, founder- and employee-owned companies transition ownership through ESOP structures, while also providing corporate finance and investment banking services to companies already operating under employee ownership models.

NCEO data shows that existing ESOP practices largely specialize in transaction support, plan design and financing. A subset of those practices also offer ESOP investment and 1042 rollover advice.

In a press release, Raymond James said demand for ESOP solutions has increased as more companies remain privately held longer and seek tax-efficient ways to transition ownership.

“As more companies choose to remain private longer, the need for tax-efficient ownership transition strategies is growing,” Steve Hufford, Raymond James’ head of investment banking, said in a statement. 

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The ESOP argument

Experts say an ESOP is often a better option for private business owners compared to traditional acquisitions, but it often goes ignored due to the relative complexity of the strategy.

An ESOP allows owners of privately held companies to sell some or all of their shares to employees through a company-sponsored trust. The structure can give owners flexibility in how they transition ownership, allowing them to sell minority or majority stakes over time rather than executing a full sale at once.

ESOP transactions are typically financed through company borrowing and seller notes, with the company using future earnings to repay the debt. Because company contributions to the ESOP are generally tax-deductible, the structure can improve cash flow while gradually transferring ownership to employees and providing owners with liquidity.

The tax advantages can be expanded through a Section 1042 rollover, which allows eligible sellers to defer — and in some cases permanently avoid — capital gains taxes on the sale of shares to an ESOP. Qualifying for such a rollover involves a variety of specific requirements, but offers significant benefits in the end.

Alongside tax-efficiency, supporters of ESOP and 1042 transactions say the approach can also help preserve company culture and operational continuity by transferring ownership to employees rather than an outside buyer.

According to NCEO founder Corey Rosen, most owners selling to an ESOP say that legacy concerns are the primary driver behind their use of the strategy.

While ESOPs involve upfront planning and administrative costs and are not appropriate for every company, advocates say the transparency of those costs, combined with potential tax savings and employee ownership incentives, can make them a compelling alternative to traditional sale or succession options.