An Employee Ownership Trust (EOT) is a popular exit strategy that provides exiting shareholders with a tax-efficient disposal. EOTs bring numerous unique benefits to the right business – but these benefits depend on several strict rules and other considerations.

One of the most important of these is funding. While an EOT involves a change of ownership via a trust for the benefit of your employees, it is still a transaction that requires payment.  

Like most aspects of an EOT, funding can be complex because it is unlikely that enough cash is lying around to pay for a controlling stake in the business.  

Instead, funding options must be considered. Most EOT transactions include a combination of the following funding routes.

Important notes on EOT funding

• The responsibility for ensuring appropriate funding is acquired lies with the trustees, so professional advice should always be used.
• The optimal funding plan for an EOT may not be obvious immediately and will depend on a number of factors including the business size, profitability, structure and assets.
• Employees do not directly pay for the shares, because EOT is an indirect form of employee ownership.
• The EOTs ability to fund the purchase of the company depends upon the future profitability of the company.

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EOTs often pay the previous owners through deferred consideration

The previous business owners are usually paid for their shares via deferred consideration (in other words, they are paid back in instalments, like a loan).  

These payments come from future company profits, and enable a smooth transition of ownership, and boosts the affordability of the business for the EOT.

However, this is a critical consideration for the existing owners, who may need to wait several years before they are fully reimbursed for their shares.

Shareholders wanting a quick pay out may be better off with a trade sale or other exit route.

External financing to fund the EOT

Another option is external financing through a bank or other lender. These loans might use business assets as collateral and/or be based on the future cash flow of the business.  

External financing will ensure the previous shareholders are paid quicker, but interest will obviously apply and exiting shareholders will usually (dependent on the type of lending) have to sit behind the lender and be paid the remainder of the deferred consideration once the bank has been paid.

Future and historic company profits

Further funding for the EOT can be taken as a portion of the company’s profits. This can be a combination of:

• Future profits generation by the company, which can be used to pay the deferred consideration.
• If the company has built up significant cash reserves, this can also be used to fund the EOT, whether through an initial payment to the previous owners, or to contribute to the deferred consideration.

How we can help

Gravitate Corporate Finance helps lots of exiting shareholders explore the EOT route and navigate the complex transaction properly. This includes:

• Providing an accurate, independent business valuation (crucial for an EOT, because the seller is guaranteed to receive the full market value for their shares, subject to this valuation.)
• Conducting financial due diligence to assess the financial health and future profitability of the company – again, this is vital for the EOT to succeed and keep up with the deferred consideration.
• Developing the right overall funding strategy, combining deferred consideration, external financing and the correct utilisation of company profits and cash reserves.
• Securing funding, including applications and negotiations with lenders.
• Structuring the deal in a way that helps the EOT succeed, both for the seller and the employees.
• Advising on the various tax implications involved with an EOT.

Download our free EOT guide today

If you’d like to learn more about Employee Ownership Trusts, including how they work, their benefits, how they are structured, and how funding works, you can download our free, jargon-free EOT guide today.