How to Finance an EOT

Employee Ownership Trusts (EOTs) allow owners to sell a controlling interest in their company to a trust that benefits employees. For many founders, the appeal is a tax-efficient exit, cultural continuity, and a smooth handover. The practical question is the same in almost every project: how do we finance it? This article explains the main funding routes, how affordability is tested, what lenders look for, and how to structure an EOT deal that can actually be delivered and sustained.

Why financing matters in an EOT

An EOT is usually funded over time from future profits. If the funding model is too aggressive, the trust will struggle to meet repayments, starve the business of investment, or place undue pressure on cash flow. Getting the finance right protects jobs, preserves culture, and gives sellers confidence they will be paid in full.

The main ways to finance an EOT

Company-funded contributions

In most EOTs, the purchasing trust is financed by ongoing, post-tax company contributions. The business continues trading and periodically pays amounts to the EOT to service the purchase price owed to the sellers. This route keeps control within the business but requires disciplined cash flow planning.

Third-party bank debt

Specialist lenders can lend to the company to support an EOT. Debt is repaid from future profits, often over three to six years. Bank involvement brings external discipline and can accelerate payments to sellers at completion, but it adds covenants, security, and reporting requirements.

Vendor-deferred consideration

Most EOTs rely on sellers accepting part of the price as deferred consideration, paid over time. This aligns vendor interests with the long-term success of the business and reduces the upfront cash requirement. Terms typically include a fixed schedule, interest on the outstanding balance, and standard protections.

Hybrid structures

Many transactions blend an initial upfront payment (funded by cash on the balance sheet and/or debt) with staged payments from profits. A balanced mix reduces risk for both sides and can deliver fair value without over-leveraging the business.

Additional sources occasionally used

• Asset-based lending against receivables or inventory to boost initial liquidity.

• Mezzanine or private debt where traditional bank appetite is limited.

• Sale and leaseback on property or equipment to release capital.

• Modest equity or preference share instruments (used carefully to maintain EOT control and qualifying status).

Testing affordability: what good looks like

Cash flow coverage

The core test is simple: can the business comfortably meet its operating needs and still service EOT payments? Sensible plans target a healthy debt service coverage ratio (DSCR) with headroom under downside scenarios. Build in seasonality, working capital swings, and reinvestment needs.

Sustainable payout schedule

Repayment profiles must reflect the business model. Services businesses with recurring revenue can often sustain shorter profiles. Project-based or cyclical companies may need longer tails and more covenant headroom.

Capex and growth

An EOT should not freeze the company. The plan must ring-fence essential capex, hiring, and marketing to protect future earnings. Cutting growth spend to fund the deal is a false economy.

Resilience testing

Lenders and trustees will expect a base case and downside cases. Model what happens if margins fall, a key client churns, or interest rates rise. A robust plan shows the company can still meet obligations while staying within covenants.

How banks underwrite EOT lending

• Quality of earnings - Banks favour stable, well-documented earnings with low customer concentration, recurring contracts, and clear pipeline visibility.

• Management depth - A credible leadership team is critical. Lenders want to see succession beyond the founder, with delegated authority and proven performance.

• Governance and reporting - EOTs require trustee oversight, clear board rhythms, and reliable monthly reporting. Lenders look for mature controls and timely information.

• Security and covenants - Facilities may include debentures over company assets, cash sweeps, leverage/coverage covenants, and information undertakings. Terms vary by lender and sector.

Valuation, price, and structure in an EOT

Independent valuation

An EOT must purchase shares at fair market value. An independent valuation supports the price, underpins trustee decisions, and gives sellers confidence. Independent advice also helps ensure the structure meets HMRC requirements.

Price composition

A typical structure might be a blended consideration: an initial payment at completion (from cash and/or debt) plus deferred consideration paid over time from profits. The objective is fair value without over-burdening the business.

Interest on deferred amounts

Sellers commonly receive interest on deferred balances. The rate should be commercial and affordable, reflecting risk, security, and alternative funding options.

Earn-outs vs deferred consideration

EOTs usually favour fixed deferred payments over performance-based earn-outs. The trust’s purpose is to acquire and hold the business for employees’ benefit, not to run complex incentive ratchets. Keep it clean and deliverable.

Trustee responsibilities and compliance

Control requirement

To qualify for the principal UK tax reliefs, the EOT must acquire and maintain a controlling interest (more than 50% of the ordinary share capital and voting rights). Structures must respect this at completion and thereafter.

Equality and benefit

All eligible employees must be able to benefit on a broadly equal basis. Bonus or distribution policies should be transparent, fair, and aligned with long-term performance.

Ongoing governance

Trustees act in employees’ collective interests. They will monitor affordability, approve major decisions affecting value, and ensure the funding plan does not unfairly prejudice the company or workforce.

Typical steps and timeline

1. Feasibility review

   Confirm strategic fit, leadership readiness, trading resilience, and headline valuation range. Build initial funding scenarios and coverage tests.

   
   

2. Independent valuation and structuring

   Commission a valuation, agree heads of terms, map price, timing, and funding mix (cash, debt, deferred).

   
   

3. Lender engagement (if applicable)

   Share financial model, due diligence pack, and governance plan. Negotiate covenants, security, and drawdown profile.

   
   

4. Legal documentation

   Trust deed and governance framework, share purchase agreement, vendor loan notes, banking documents, and employee communications.

   
   

5. Completion and transition

   Close the transaction, transition governance, and implement the reporting and payment schedules.

   
   

6. Post-completion monitoring

   Maintain trustee reporting, covenant compliance, profit retention policy, and employee engagement.

   
   

Key documents you’ll need

• Independent valuation report.

• Financial model with base and downside cases.

• Business plan and monthly management accounts.

• Trust deed, trustee board terms, and conflict policy.

• Share purchase agreement and vendor loan note terms.

• Banking term sheet and facility agreements (if using debt).

• Employee communication plan and FAQs.

Common mistakes to avoid

• Over-optimistic modelling that ignores working capital and capex.

• Paying too much upfront and starving the business of cash.

• Inadequate governance or thin management bench post-transaction.

• Complex consideration mechanisms that confuse trustees or lenders.

• Neglecting culture and communication; EOTs succeed when teams understand the “why” and “how.”

An EOT is a powerful exit and succession route, but only when the funding plan is realistic. Start with feasibility, respect governance, and build headroom into your model. With the right structure and advice, you can deliver a fair price to sellers, a resilient plan for employees, and a sustainable, successful future for the business. Contact Us today.