How is the Employee Ownership Trust funded?
Many business owners like you often want to know about funding possibilities when considering an Employee Ownership Trust (EOT).
Several funding avenues exist, and the most suitable option depends on specific factors such as projected future profits, company valuation, surplus cash, and the feasibility of obtaining external loans. Explore the following explanations for commonly employed funding approaches:
Scenario 1: Company-funded
This is the most common approach.
In this scenario, the sale to an EOT involves instalment payments over time, primarily derived from the company's future profits. If the company possesses surplus cash at the sale date, it can be utilized for an initial down payment. The company makes periodic payments to the EOT, which, in turn, facilitates purchase price instalments.
Here is an example: ABC Ltd is sold to an EOT for £5 million with a £1 million surplus cash on the sale date.
On the sale date:
At the end of each year over the next five years:
Scenario 2: Bank Loan to Company
On the sale date, it might be feasible to secure a larger initial payment by obtaining a bank loan for the company. The bank loan, along with interest, is repaid from the company's future profits. However, the company's profits are still essential for fulfilling the remaining purchase price to the selling shareholders.
The loan could be secured against future profits or, if you have fixed assets in the business it may be possible for asset finance.
On the sale date:
At the end of each year over the next five years:
Scenario 3: Bank Loan to EOT
In some instances, a bank loan to fund the EOT can be made directly to the EOT rather than channelled through the company. The feasibility of this approach depends on the company's financial standing. In practice, it’s a rarely-used funding option.
On the sale date:
At the end of each year over the next five years:
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