How the Money Works in an Employee Ownership Trust (EOT)

When business owners consider selling their company to employees through an Employee Ownership Trust (EOT), one of the first questions they ask is:

“How does the money really work in an EOT?”

Getting this part right sets the foundation for a successful transition.

Employee Ownership Trusts offer a simple, mission-aligned alternative to private equity or ESOPs — but the financial mechanics behind the scenes still matter. Who funds an EOT? What types of financing are used? And how do owners actually get paid?

Let’s break down the core components of an EOT transaction, explore where the money comes from, and look at how a typical deal is structured in practice.

‍

4 key elements of an EOT transaction

While every business and selling owner has unique goals, there are four core elements that make up a financially sound, well-aligned EOT deal:

1. Employee Ownership Trust

The EOT is a legal agreement between the selling owners, employees (especially key leaders), and the company that outlines how the company will be managed going forward. It also helps to ensure long-term stability through built-in business succession planning — giving confidence to employees, investors, lenders, and the broader community.

2. Transaction Plan

This plan defines how and when the owner will be paid, both upfront and over time. As the owner's risk decreases through the payout plan, employees gradually receive a greater share of company profits. This structure aligns everyone’s incentives: if the business grows, both employees and the owner benefit. If profits decline, owners are protected and everyone is shielded from undue liability.

3. Waterfall Agreement

A waterfall agreement outlines the order in which funds are distributed. This "waterfall" ensures the company’s capital is used to meet the goals of the transaction — securing owner payouts while supporting long-term growth. It can also be used to build in charitable contributions, if desired by the seller.

4. Long-Term Upside Protection

While optional, we recommend that owners retain a minority stake (often 10%) after the sale. This allows them to benefit from future success while stepping back from day-to-day operations and reducing personal risk.

‍

Where does the money come from in an EOT?

When funding an Employee Ownership Trust (EOT) transaction, companies often use a mix of internal and external sources — depending on their size, profitability, and goals.

Here’s a breakdown of the most common external and internal financing sources used in EOT transactions:

External Financing Sources

• Bank Loans: Traditional debt financing provided by commercial lenders based on company assets, cash flow history, and future projections. This is typically the most accessible and cost-effective form of capital, suitable for stable companies with strong cash flow.
  

• Mezzanine Debt: A flexible form of financing that sits between debt and equity, typically with higher interest rates and customizable repayment terms — such as deferred payments or partial equity. This option can help companies access additional capital when bank lending alone isn’t enough.
  

• Third-Party Silent Equity: Capital from investors, foundations, or mission-aligned funds who provide equity without seeking control, benefiting from long-term equity appreciation and a future buyback of shares. It’s often used by companies looking to bring in values-aligned capital without external pressure to sell or scale quickly.
  

• Vendor Financing: Extended payment terms provided by key vendors or partners as part of a contractual relationship. This can be helpful for companies that are critical to a vendor’s supply chain and may reduce the need for traditional loans or investor capital.

Internal Financing Sources

• Seller Notes: The selling owner finances part or all of the transaction price, agreeing to be paid out over time via debt notes or earn-out agreements. This option simplifies the EOT financing process and can align incentives for growth.
  

• Company Share Buybacks: Rather than dividends or bonuses, the company uses retained earnings to gradually repurchase shares from the selling owner. This financing option allows for flexible cash deployment, spreads taxation out over time, and decreases the selling owner's risk while still participating in upside.
  

• Balance Sheet Cash: Businesses with meaningful reserves use existing cash to partially or fully finance the EOT transaction. This can streamline the deal structure, close gaps in external financing, and minimize company debt.
  

• Direct Employee Share Purchases: Employees invest personal capital to buy shares directly, increasing commitment and motivation. This option is typically used as supplemental funding rather than fully financing the transaction.

‍

What does a typical EOT transaction look like?

Just like no two businesses are the same, an Employee Ownership Trust (EOT) transaction can be tailored to meet the specific goals of both the selling owner and the company. However, here are a few common capital structures we see:

1. Balanced Split Transaction

This approach spreads the funding sources evenly across external debt, internal reserves, and deferred owner payments — reducing risk for all parties involved.

Example capital stack:

• 34% bank or external financing
• 33% internal cash sources
• 33% seller note

2. Majority External Financing

For companies with strong balance sheets and hard assets, bank loans may cover most of the purchase, with smaller portions coming from internal sources and long-term owner financing.

Example capital stack:

• 60% bank loan
• 30% seller note
• 10% long-term owner hold

3. 100% Seller Financing

The selling owner finances the entire EOT transaction, allowing for a simplified path forward without requiring external debt or employee capital.

Example capital stack: 

• 100% seller payout over time
  

Remember: The right financing structure for your EOT will depend on your company’s financial health, long-term goals, and personal priorities as a selling owner.

‍

A thoughtful exit, built for long-term success

Selling your business is one of the most important financial and emotional decisions you’ll ever make. From planning for personal wealth to protecting your employees’ futures, it’s not just a transaction — it’s a legacy.

And with 75% of business owners regretting their exit within a year, the stakes are just too high.

An Employee Ownership Trust (EOT) offers a flexible and financially sound way to transition ownership. It supports the long-term success of your business, your employees, and your values.

At Common Trust, we've helped businesses of all sizes design EOT transitions that align with each owner's goals, timeline, and stage of growth. If you're exploring how to finance an EOT — or curious what a deal might look like for your company — we’re here to help you evaluate your options with clarity and confidence. Schedule a free advisory call today.

{{cta-short}}

‍