EOT Funding Explained: Unlocking the Path to Employee Ownership

EOT funding refers to the method used by the EOT to finance the acquisition of the exiting shareholders’ stake.

An EOT is created to facilitate the acquisition of the company, and as a newly incorporated trust, it will have no pre-existing capital. As such, the EOT must consider sources of capital to finance the transaction.

More often than not, an EOT sale is funded by way of the company’s current cash reserves, with the balance of the price being paid to the selling shareholders on deferred payment terms using future profits.

In most cases, therefore, the EOT will be reliant on the future financial performance of the company to enable the EOT to pay the selling shareholders.

Accordingly, it will be important for the EOT to assess the company's cash flow and to ensure that flexible repayment terms are built into the share purchase agreement. This would allow for payments to be made while accounting for changes in the company’s financial performance, thereby ensuring business liquidity and stability.

If you are considering exiting your business whilst rewarding your employees, EOT funding might be the ideal solution for you.

As an EOT ourselves, we can guide you through the legal complexities of the transition process, including:

• Discussing whether the EOT structure would be suitable for you and proposing alternative structures, if necessary;
• Advising on the various funding options that may be appropriate to fund your exit;
• Establishing the EOT;
• Drafting the required documentation for the acquisition whilst ensuring compliance with tax regulations;
• Negotiating the loan facility and associated security with the lender; and
• Liaise with your tax advisors and lender(s) or alternatively facilitate introductions to tax and financial advisors and lenders (as appropriate).