Paying for the exit: deferred consideration, valuation and cash flow after an EOT
One of the least discussed facts about an EOT is that it's rarely paid for in full on the day it completes.
The trust doesn't have the cash, so a significant part of the purchase price is deferred and paid to the selling owners from the company's future profits.
New research looks at what that story looks like in practice, drawing on 26 UK firms that have adopted an EOT.
Most firms are still paying
Only two of the 26 firms had paid their deferred consideration in full. Half reported that repayments were on track within the expected timeframe, while 42% said payments were running slower than anticipated. None were ahead of schedule. (Interestingly, in our own experience at IDT, of the 80+ EO clients that we have worked with, only a couple have paid back early, the majority are slowly repaying back the deferred consideration, whilst c.25% have renegotiated the cashflow in some way.)
The means of payment adds to the pressure. 92% of the firms relied on internal resources, and only one used third-party finance. That supports independence, but it also means the business itself carries the weight of repayment through its own cash flow.
Valuation decides how hard the road is
Respondents drew a direct line between the price set at the start and the pressure felt afterwards. Unrealistic valuations, they warned, can strain cash flow, delay financial benefits for employees and lead to dissatisfaction. They also noted that being open about how the valuation was reached, and whether the deal is affordable, can influence trust and engagement once the transition is done.
The researchers' conclusion is that sellers and advisers should focus on realistic valuations, robust cash flow forecasting and sustainable repayment structures, balancing the sellers' objectives with the long-term financial health of the business.
Ownership transfer is not governance
The researchers draw a clear line between the two. Transferring ownership doesn't automatically create effective governance. Respondents pointed to the need for trustee training, clear financial discipline and accountability, experienced advisers, and capable senior leaders and independent trustees.
Founders often stay
Deferred payment also shapes what happens to the people who sold. Several respondents tied their exit timing, lifestyle and continued involvement to the repayment schedule. That can bring valuable stability and continuity, but it also raises an uncomfortable question the report doesn't shy away from: how much has ownership and control really moved if the founder is still central to the business?
The answer is rarely all or nothing. It does make succession planning and leadership development an important part of the picture, so the business isn't dependent on one person long after the sale.
For boards and trustees, a few questions follow naturally:
- How sensitive is the repayment schedule to a poor year, and how much headroom do we have?
- If payments slip, what gets squeezed first: investment, pay, or benefits for employee owners?
- Do employee owners understand that they’ve been gifted the shares free of charge, but that the company is carrying a financial obligation as a result?
- What's the plan for leadership as the founder steps back?
About the research: This blog draws on Employee Ownership Trusts: Beyond Completion – Post-Transition Realities, Risks and Implications by Dr Israa Kishk (University of Northampton), Tracy Evans (EMW) and Adrian Pryce DL (Be. Partners Ltd / IoD National Sustainability Group). The findings are based on survey responses from 26 UK EOT firms.
Find other articles about this research here and here.
