EOT finance: how employee-owned companies borrow

Most sales to an employee ownership trust are paid for slowly. The founders take some cash at completion and the rest as a vendor loan, repaid from profits over several years. Bank finance can change that: more for the founders on day one, the vendor loan cleared early, and working capital while payments run. The catch is that many lenders don't know how to underwrite a trust. Here is how it works, and how to get it past a credit committee.

How a typical EOT sale is paid for

On day one the trust has no money. So it buys the shares partly with cash the company already has, and partly with a promise to pay the rest later: the deferred consideration, often documented as a vendor loan. The company then makes contributions from its profits to the trust, which pays the founders in instalments, commonly over four to seven years.

It works, but it is slow for the founders, and it ties up a large share of profit for years. Employees, meanwhile, are waiting for the tax-free bonuses that employee ownership was meant to bring.

Three things finance can do

1. Pay the founders more at completion

A senior loan alongside the company's own cash increases the day-one payment and shrinks the vendor loan. The lender is repaid first; the founders' deferred balance waits behind it.

2. Refinance the vendor loan

A few years in, once the company has shown it can carry the payments, a lender can clear the remaining deferred consideration in one go. The founders are paid out, and the company repays a lender on agreed terms instead. Vendor loan notes make this simpler, because the bank simply replaces the vendor as creditor without reopening the sale agreement.

3. Working capital while the payments run

Deferred consideration drains cash every quarter. For a professional services firm, a facility against unpaid client invoices, or a revolving facility sized on the forecast, keeps the business funded so the vendor payments never squeeze wages or growth.

Why lenders stall on EOTs

Ordinary acquisition lending assumes there is an owner behind the borrower. An EOT removes that owner, and three things follow:

• The person with significant control is a trust. Know-your-customer checks expect an individual. After an EOT sale the PSC is usually the trustee company, and many onboarding processes don't know what to do with that.
• Nobody can give a personal guarantee. No one owns the shares personally, so the lender is relying on cash flow, not a director's assets. That is a cash flow loan with a higher risk rating, which some lenders won't take at all.
• Profit has three claims on it. Debt service, vendor payments and employee bonuses all come from the same profit. Lenders will usually insist the vendor loan is not repaid while their loan is outstanding, so the founders need to understand where they will stand.

None of these is a reason to decline. They are reasons a credit paper has to be written properly.

What gets an EOT case approved

• The trust explained up front: trust deed, trustee board, who the trustees are and how they decide.
• The vendor loan terms: balance, interest, schedule, and whether it can be subordinated or repaid early.
• A forecast with every claim on profit in it: debt service, vendor payments, employee bonuses and tax, with cover shown year by year and under a downturn.
• A management team that runs the firm without the founders: the question every credit committee asks about a professional services business.
• The right lender first time: a handful of lenders actively fund EOTs. Approaching the wrong ones wastes months and leaves a trail of declines.

That pack is what we build before any lender sees your name. We are paid by the lender, and we disclose the amount to you in writing before drawdown.

Common questions

Can an employee ownership trust borrow from a bank?

Yes. The loan can be made to the trading company, to the trustee, or both. Repayments come from the company's profits, usually paid up to the trust as contributions. Fewer lenders do it than for a normal buyout, so lender choice matters more than rate.

Will the directors have to give personal guarantees?

Usually not. Nobody owns the shares personally after an EOT sale, so lenders who understand EOTs lend on the strength of cash flow and the company's own security rather than a director's home.

Can we refinance the vendor loan part-way through?

Often, yes. If the business has paid down some of the deferred consideration and profits are steady, a lender can clear the remaining balance so the founders are paid out sooner. Check the sale agreement for any early repayment terms first.

How big does the business need to be?

As a rough guide, lenders look for sustainable profits of around £500,000 or more before they will lend meaningfully against an EOT. Smaller firms can still fund working capital, but a large refinance needs that level of profit behind it.