Exploring Your EOT Funding Options

EOT.co.uk
May 8
3 min read

How to finance an Employee Ownership Trust (EOT) transition successfully

Transitioning to employee ownership through an Employee Ownership Trust (EOT) is an increasingly popular succession route for UK business owners. It provides a tax-efficient exit, preserves the company’s legacy, and rewards the workforce — but as with any business sale, funding the transaction is a critical consideration.

Let's explore the main EOT funding options, the pros and cons of each, and how to structure your deal for a smooth and successful transition.

Why Funding Matters in an EOT

While EOTs are often promoted as a "tax-free" way to sell your business — with qualifying sales free from Capital Gains Tax — they are not risk-free or cash-upfront transactions in most cases.

Unlike a traditional third-party sale where a buyer brings their own capital or funding, an EOT is funded by the business itself, often over time, using future profits.

That means careful planning is required to ensure the EOT deal is affordable, sustainable, and aligned with the business’s future performance.

Option 1: Cash Reserves (Immediate Partial Payment)

If the company has surplus cash on its balance sheet, this can be used to fund an initial lump sum payment to the exiting shareholders.

Pros:

Provides a meaningful upfront payment.
Keeps the transaction simple and interest-free.
Low risk for both seller and trust.

Cons:

Reduces working capital.
May limit future investment or growth.
Usually only covers a portion of the total value.

Option 2: Vendor Loan (Deferred Consideration)

The most common funding structure for an EOT involves a vendor loan — where the trust agrees to buy the business and repays the former owner(s) over time from future profits.

Pros:

Flexible repayment terms (e.g. 3–7 years).
No need for third-party finance or personal guarantees.
Aligns payment with business performance.

Cons:

Sellers take on repayment risk.
Requires careful cash flow forecasting.
Interest may or may not be charged.

Option 3: Bank or Third-Party Lending

In some cases, the EOT may take out a commercial loan to fund part of the purchase price upfront, supported by the company’s profitability and repayment capacity.

Pros:

Increases upfront payment to the seller.
Can reduce long-term vendor exposure.
May allow faster transaction.

Cons:

Increases business leverage and repayment pressure.
May require security or guarantees.
Not always available, especially for smaller firms.

Option 4: Hybrid Structures

Many EOT deals use a blended approach, combining available cash, vendor loans, and possibly external finance. This offers flexibility while balancing risk and reward for all parties. Example structure:

£250K paid from cash reserves at completion.
£1M vendor loan over 5 years at 4% interest.
£500K third-party loan repayable over 3 years.

What About Valuation?

Remember: the funding mechanism does not determine the value of the business. The company should be independently valued, typically based on a multiple of sustainable profits. The deal structure simply reflects how and when that value is paid.

Key Points to Consider for EOT Funding

Before deciding on your EOT funding route, consider the following:

How much can the company afford to pay upfront?
What repayment period is realistic and sustainable?
Are external lenders viable or desirable?
How will the deal impact staff motivation and business operations?

It’s essential to balance commercial sense with legal, tax, and regulatory requirements to ensure your EOT is set up for long-term success.

Funding Your EOT the Smart Way

The right EOT funding structure depends on your business’s financial position, your personal goals, and the desired outcomes for employees and future growth. Most importantly, it must be realistic and sustainable. With the right planning and support, you can structure an EOT transaction that secures your exit, rewards your team, and preserves your legacy.

Considering an EOT transition? Speak to the team at EOT.co.uk to arrange a confidential feasibility review. We help business owners understand value, funding options, and how to make an employee ownership model work — now and into the future.