Funding an employee ownership trust: how the sale is paid for

This guide is for owners of profitable trading companies considering a sale to an employee ownership trust (EOT), and for the directors who will run the business afterwards. It explains where the money actually comes from, because that is the part most owners find least intuitive: the buyer is a trust with no assets, and the sellers are usually paid out of profits they have not yet earned. Smart Funding Solutions is a broker, not a lender; where external debt is part of the structure, we approach lenders on our panel of 300+ that fund ownership transitions, arranging facilities from around £10,000 to £500,000+, with larger facilities available in suitable cases. For other ways to fund a change of ownership, see our acquisition finance guide.

01The short version: the company pays for itself

An EOT is a trust that buys a controlling interest in a company and holds it for the benefit of all eligible employees. The sellers agree a price, usually supported by an independent valuation. The trust signs a share purchase agreement promising to pay that price, and then the company makes cash contributions to the trust, which passes them straight on to the sellers.

So the three sources of money are all, in the end, the company's:

1. Cash already on the balance sheet, contributed to the trust at completion.
2. Borrowing by the company, where a lender advances funds that are contributed to the trust to increase the upfront payment.
3. Future profits, contributed year by year to pay the deferred balance of the price.

In most smaller EOT sales the third source is the largest. The sellers are, in effect, lending most of the price back to the business and being repaid from its earnings. That is why an EOT suits companies with steady profits and why a funding plan matters more than the headline valuation.

02Why owners choose an EOT, and what they give up

Where the statutory conditions are met, a disposal of a controlling interest to a qualifying EOT can be free of capital gains tax for the sellers. HMRC's capital gains manual on employee-ownership trusts sets out the conditions, which include the trust benefiting all eligible employees on the same terms and the company being a trading company. Employees of an EOT-owned company can also receive tax-free bonuses up to an annual limit. The Employee Ownership Association's explanation of types of employee ownership sets the EOT alongside other models.

The rules were tightened from October 2024. Among other changes, former owners and people connected with them can no longer control the trustee board, the trustees must be UK resident, the trustees must take reasonable steps to ensure the price is not more than market value, and the period in which a later breach can claw back the sellers' relief was lengthened. Owners should take specialist tax and legal advice; this guide covers the funding, not the tax.

The trade-offs are real. Sellers usually wait years for most of their money, their deferred payments depend on the business continuing to perform, and they give up control. A trade sale can deliver more cash on day one, and an owner selling to a trade buyer may still be able to claim Business Asset Disposal Relief on qualifying gains.

03Where each piece of funding comes from

Surplus cash

Many companies that suit an EOT have built up cash over years of profitable trading. The company can contribute surplus cash to the trust at completion. The limit is working capital: a business that empties its bank account to pay the sellers may then struggle with a slow-paying customer or a seasonal dip. Lenders and advisers will want to see how much cash the business needs to keep.

A term loan to the company

If the sellers want more on completion than the cash reserves allow, the company can borrow. The lender lends to the trading company, not to the trust, and usually takes a debenture over the company's assets. Because the directors do not own the shares after the sale, lenders lean more heavily on cash flow and company security than on personal guarantees, which makes the underwriting closer to a cash-flow loan than a typical owner-managed business loan. Some lenders will still ask for guarantees; others will not. Our page on business loans without a personal guarantee explains how lenders approach that question generally.

Asset-backed facilities

A company with a large debtor book can use invoice finance to release cash on completion, which can then help fund the upfront payment. Property owned by the company can support a secured loan. Both reduce the reliance on unsecured cash-flow lending, but both also tie up assets the business may want to borrow against later.

Deferred consideration

The balance of the price is left outstanding and paid in instalments from future contributions. The sellers usually agree that their deferred payments rank behind any bank debt, and the lender will expect a formal agreement to that effect. Our guide to vendor finance and deferred consideration explains how subordination, interest and security for the seller are usually handled.

04Illustration: a £5 million EOT sale

Illustration. The company and figures below are invented to show the mechanics; a real structure depends on the valuation, profits, cash and lender appetite. A design and build contractor is valued at £5,000,000 and its two founders sell 100% to an EOT.

The funding test is simple to state and hard to pass: in each of the next six years, after tax, wages, investment and loan repayments, the company must generate enough cash to contribute the deferred instalments. If the business has one poor year, the deferred payments slow down, which is the founders' risk. If it cannot meet the loan repayments, the lender's security is at risk, which is why lenders model a downside case and want the deferral to give way first.

Many companies that suit an EOT have built up cash over years of profitable trading.

05What lenders look at in an EOT deal

• Total cash commitments. Loan repayments plus deferred consideration, measured against realistic post-sale profits. Lenders are wary of structures where almost every pound of free cash is already promised.
• The management succession. Who runs the company once the founders step back, whether they have done the job before, and whether the founders stay on in a transitional role.
• Governance. The trustee board, any independent trustee, and how the company board and trust interact. Lenders want clarity on who can make decisions.
• The valuation. An inflated price increases deferred payments and weakens cover. The post-2024 market value requirement helps, but lenders still form their own view.
• Intercreditor terms. How deferred payments to the sellers are restricted if the company breaches its loan covenants.
• Employee engagement. A motivated workforce is the investment case for an EOT. A lender will ask how the change has been communicated.

06Refinancing the deferred balance later

Several years after the sale, an EOT-owned company with a clean trading record may be able to borrow to pay off the remaining deferred consideration early. The sellers receive their money sooner, and the company swaps an obligation to its former owners for a conventional loan. Lenders assess this like any refinance: affordability, the track record since the sale and the strength of management. It is a common reason owners accept a long deferral at the outset.

07Documents an EOT lender will want

08Step by step

1. Take tax and legal advice on whether an EOT fits your objectives and your company.
2. Obtain an independent valuation and agree the price and the split between upfront and deferred payment.
3. Model cash flow for the full deferral period, including a downside case.
4. Test lender appetite if an upfront payment beyond surplus cash is needed.
5. Set up the trust, appoint trustees and document the sale, contributions and subordination.
6. Complete, contribute the upfront cash and communicate the change to employees.

09Alternatives worth comparing

An EOT is one of several succession routes. A management buyout gives named managers the equity rather than all employees, and usually puts more personal risk on them. A partial exit, where the company buys back some shares or a co-owner buys out another, is covered in our guide to shareholder buyout finance. A trade sale may produce more cash on completion. Our comparison of debt and equity funding is useful if an outside investor is also in the frame.

10Where we fit in

Most EOT funding is arranged by the company's advisers and the sellers themselves. We are useful when an upfront payment needs outside debt, or when an EOT-owned company later wants to refinance the deferred balance. We present the company's cash flow and succession plan to lenders on our panel that understand ownership transitions, and lenders make the decision. It is free to enquire; any broker fee is disclosed separately before you proceed.