Where does the money for an EOT come from?

Where does the money come from?

Looking at selling your business to an Employee Ownership Trust (EOT) but not sure where the funds to do that will come from?

It’s a question we often get asked by our clients and there are actually a few different ways EOTs can be funded. The chosen option will be dependent on various factors for your particular situation and company including anticipated future profits, valuation, surplus cash and whether an external loan is feasible.

Read on for an explanation on the most frequently used funding approaches.

Scenario 1

No external loan

If you sell your company to an EOT, you’ll generally be paid in instalments over time from the company’s future profits. However if the company has any surplus cash on the sale date it is often possible to use that surplus cash to fund a down payment.

Each payment will be funded by the company making a payment to the EOT, which the EOT then uses to pay a purchase price instalment.

The following diagrams, illustrate how the owners of Naddle Systems Limited sell their company to an EOT for £5 million, when it has £1m surplus cash.

On the sale date:

on the sale date


At the end of each year over the next five years:


No external loan - pic 2

Scenario 2

Bank loan to company

Sometimes on the sale date, it may be possible to arrange for a larger initial payment to be funded by a bank making a loan to the company. In this scenario, the bank loan will be repaid (with interest), out of the company’s future profits. It will generally still be necessary for the company’s profits to also be used to pay the rest of the purchase price to the selling shareholders, as it is unlikely to be possible for a bank to lend the full purchase price.

On the sale date:

Bank Loan to company pic 1

At the end of the year over the next five years:

Bank loan to company pic 2

Scenario 3

Bank loan to EOT

When a bank loan is used to fund the EOT, this can sometimes be made directly to the EOT rather than through the company (which is preferable) will depend on the company’s financial position.

On the sale date:

Bank loan to EOT - pic 5

At the end of each year over the next five years:

Bank loan to EOT - pic 6

It should be noted that any payments made by a company to its EOT must be out of the company’s distributable profits.

If you have any further questions about Employee Ownership and how to fund an EOT for your company, please get in touch and one of our lawyers will be happy to assist.

Find out more about Employee Ownership Trusts here.