What Cannabis Operators Still Get Wrong About Independent Buyouts and ESOPs 

By Darren Gleeman, Managing Partner, MBO Ventures

Most operators I speak with have already formed an opinion about Independent Buyouts and ESOP-structured companies before the conversation starts. It’s usually based on inaccurate information when these three objections come up consistently: the tax benefits are exaggerated, lenders won’t participate, and an ESOP prevents a future sale. Each deserves clarity and a direct response.

The Tax Benefit Is Real and Specific

When a cannabis company converts to 100% S Corporation ESOP ownership, the trust holding the shares is a tax-exempt entity. Under S Corporation pass-through rules, income attributed to a tax-exempt shareholder carries no federal income tax liability nor state income tax liability. Congress established this in 1998, and thousands of companies across manufacturing, construction, and professional services have used it since, including popular everyday brands like WinCo and King Arthur Baking.

For cannabis operators, this means zero federal income taxes and zero state income taxes. 

Lender Resistance Is a Sourcing Problem

Independent Buyouts are typically financed through combinations of third-party senior debt or seller financing. The mechanics are well understood by lenders who work in this space. The financing exists, so the real question, as with every capital function in cannabis, is which lenders will engage with plant-touching businesses.

What those lenders want to see is healthy free cash flow, and that’s exactly where the ESOP structure immediately helps its case. Eliminating federal and state income tax produces a significant boost to free cash flow from day one, which directly strengthens the debt serviceability profile that lenders underwrite against.

This means that lenders will lend to companies structured inside ESOPs, and their terms will be much better due to the fact that these firms have substantially more free cash flow. 

Employee-Ownership Does Not Eliminate a Future Sale

Employee-owned companies are acquired regularly. Just a couple of months back, Morgan Stanley Capital Partners made a substantial investment in Olsson, an ESOP-owned engineering firm in Nebraska.  

An ESOP-owned company can sell shares to an outside buyer just like any other company.  When a strategic or financial buyer submits a bid, the Board of Directors, along with the trustee representing the employees, will evaluate it. If everything checks out, the sale proceeds. A company operating without federal and state income taxes accumulates cash more efficiently; when applied to debt reduction and reinvestment, this strengthens the balance sheet. 

A business entering a sale process after several years of ESOP ownership is frequently in better shape than it would have been under a conventional structure

Why These Assumptions Keep Circulating

These objections spread because ESOPs and Independent Buyouts are unfamiliar to most cannabis operators, and unfamiliarity lets assumptions harden into conclusions. Competitors push on these pressure points even though they are based on a fallacy.

An Independent Buyout isn’t right for every company. It requires the right business profile and expert advisors who have actually executed these transactions in the past. But for operators who qualify, it offers a path to liquidity that doesn’t require selling to a strategic acquirer at terms they wouldn’t have accepted in a better market. Founders who never have that conversation will find out later what those assumptions cost them.

Operators interested in alternative liquidity strategies, succession planning, and the growing role of employee ownership in cannabis will have an opportunity to meet Darren Gleeman, Managing Partner of MBO Ventures, at the Chicago Cannabis Capital Conference on June 15–16.

As capital remains selective and traditional exit opportunities remain limited for many founders, conversations around Independent Buyouts, ESOPs, and other non-traditional ownership structures are becoming increasingly relevant. Gleeman will be among the industry leaders discussing how operators can unlock value, improve cash flow, and create long-term ownership solutions without relying solely on strategic buyers or public markets.