What is the current bank appetite for lending to employee ownership trusts?

When discussing Employee Ownership Trust (EOT) transactions with advisers and business owners, one of the more frequent topics we are asked about is the level of appetite banks have for funding a sale. Questions on this topic have become even more frequent with the current disruption in the lending markets.

How do banks view EOTs? 

As we have previously explored, a key challenge of selling a business to an EOT, rather than to a more traditional buyer, is that there can be limited cash available to the vendors at the point of completion. This usually means that a substantial proportion of the price owed to the sellers is paid out of future profits, often over many years. However, using bank debt to fund an EOT transaction can unlock additional funds for the vendors at the point of completion: a compelling prospect.

Our experience of lenders and EOTs is that they typically sit in one of two camps: those that love EOTs and those that do not fully understand them and won’t touch them.

Although introduced nine years ago, the popularity of EOTs is much more recent. As such, not all lenders are fully familiar with them. For those where familiarity is lacking, the prospects of them lending to an EOT are slim at best, even with guidance from knowledgeable advisors. 

Meanwhile, lenders who are familiar with EOTs tend to understand the commercial advantages such an ownership structure affords to a business. In our experience, these lenders typically have a healthy appetite for funding EOT sales. Such lenders come from a broad spectrum, from several of the high street banks, to challenger banks, asset-based lenders (ABLs) and debt funds.

EOT savvy lenders recognise that employee-owned businesses have demonstrated more resilience to economic headwinds, as the entire staff base is motivated to pull at the oars together; it is in their clear economic interest to do so. In addition, lending at the point of completion rarely bridges the entire value-gap and as such there is usually an opportunity to lend again when the original loan is substantially repaid. This results in the sellers getting another tranche of value accelerated to them and means that the lender gets another bite at the cherry with the same business, without the need for new customer acquisition.

Lending to EOTs must be sensible and demonstrably affordable. Often with owner-managed businesses there is pride that a long and successful trading history has been achieved without debt; and so suddenly loading the balance sheet with lending could feel uncomfortable. Lenders are as sensitive to this as the sellers. Typically, the leverage multiples that a lender is willing to provide for an EOT transaction are slightly muted, compared to more general lending, despite the commercial upsides to employee-owned businesses. We are seeing multiples of around 2.0x – 2.5x for SME businesses undertaking an EOT sale. Larger firms may attract higher multiples, but the same points around exercising caution must apply.

Despite the current unsteady nature of the lending market, which is suffering from rising interest rates, uncertainty around inflation combined with uncertainty around the macro-economic situation, plenty of lenders remain keen to put their money to work in an EOT transaction. Pricing is higher of course and transactions which include lenders are taking a little longer, but our key message is that for owners of strong businesses who are looking to sell into an EOT, there remain plenty of options to explore. We would be delighted to assist you or your clients in finding suitable funding for an EOT transaction.