"Where do the employees get the money?" is the first question every owner asks. The answer: they don't. Here is where the money actually comes from, and what each source costs.
The shape of the problem
The trust buys the company but has no funds of its own. The company has the funds — its cash today and its profits tomorrow — but the company is the thing being bought. EOT funding is the set of mechanisms that bridge this politely: the company contributes money to the trust, and the trust pays the seller.
Every EOT purchase is therefore a blend of three ingredients: existing company cash, deferred consideration, and external debt. The craft is in the proportions.
Ingredient one: the company's own cash
Surplus cash on the balance sheet funds the day-one payment. "Surplus" is the operative word — the business must keep enough working capital to trade comfortably and enough headroom to survive a bad year, because a bad year is now also a missed payment to the vendor. We routinely see initial payments of anywhere from 10% to 50% of the price funded this way; more than that is rare and usually unwise.
Ingredient two: deferred consideration
The balance of the price sits as a debt owed by the trust to the seller, paid down from the company's future profits — typically over three to seven years. Points that matter more than they first appear:
- Interest. Deferred consideration can carry a commercial rate of interest, compensating the seller for the wait. Whether it should, and at what rate, is a genuine negotiation.
- Profiling. Flat annual instalments are simplest, but payments profiled against realistic forecasts — lighter early, heavier later — often serve everyone better.
- Protection. Sellers reasonably ask what happens if the business underperforms. Security is limited by design, but well-drafted documents cover deferral, catch-up and what happens on a later sale of the company.
- Honesty. The single most important discipline: model the repayments against cautious forecasts, not hopeful ones. A schedule the business cannot miss is worth more to the seller than a bigger number it can.
Ingredient three: external debt
Banks and specialist lenders increasingly lend into EOT transactions, secured on the company. Borrowing raises the day-one payment to the seller and spreads the company's cost over a defined term at a known rate. The costs are the obvious ones: interest, covenants, security, and less flexibility in a downturn than a patient vendor. External funding suits sellers who need more early liquidity and businesses whose cash generation can comfortably carry the service costs. It is an option, not a requirement — the majority of smaller EOTs complete without it.
The tax mechanics, briefly
The company funds the trust by making contributions to it. Handled correctly, and with the appropriate HMRC clearances obtained before completion, the arrangements work as intended; handled casually, they can create avoidable tax friction. This is one of the areas where the difference between an adviser who does EOTs constantly and one who does them occasionally shows up in the outcome.
What "affordable" actually means
Our test is deliberately unexciting. After paying the vendor instalment, the business should still be able to: invest what it historically invests; pay people properly, including some profit share early in the journey; and absorb a moderately bad year without drama. If the numbers only work when every year is a good year, the price is too high or the period too short — and it is far cheaper to discover that in a spreadsheet than in year three.
This guide is general information, not advice. Funding structures interact with tax conditions in detailed ways; take specific advice before committing. We are happy to model your numbers — get in touch.