EOT deferred consideration: what if seller payments cannot be made?

In many employee ownership trust (EOT) transactions, the purchase price is not paid in full on completion. Instead, the selling shareholders agree to be paid over a number of years, usually from future profits of the business which are then contributed to the EOT to fund payment. This structure is common because it allows the business to transition to employee ownership without requiring significant external debt. However, the selling shareholders take on the risk that the agreed payment schedule may not be met.

Why the payment structure matters from the outset

Careful planning before the sale completes is key. A valuation may support a particular purchase price, but that does not necessarily mean the company can comfortably fund that price within the intended timeframe. Affordability should be considered alongside the valuation, and detailed financial modelling should be done.

Here are three common ways to structure payment terms:

• Payments of a fixed amount paid at agreed intervals.
• Percentage of profits, paid at agreed intervals (subject to available cash). A profits-based formula may be more flexible, but it can leave sellers with less certainty.
• A combination of the two i.e. a moderate fixed amount, topped up with a percentage of profits.

When considering whether a proposed payment schedule is realistic, it is important to ensure there is a buffer for unforeseen costs or decline in company revenues. It is also important that any interest that will be payable on the deferred consideration is factored in.

Remember, payments from the company to the EOT trustee will need to be made from distributable reserves. It is not enough just to have the cash available.
As the payments are normally scheduled over a number of years, it is hard to predict the future perfectly. Therefore, it is relatively common for some adjustments to the payment to be necessary.

What if the payment schedule cannot be met?

If the EOT cannot meet the agreed payment schedule, the first step is to review the transaction documents. The share purchase agreement (or a related document) may set out what happens on non-payment. The documents will likely also confirm whether interest accrues and whether any consent or formal approval is required to amend the payment arrangements.

In practice, the most common solution is to agree a revised payment schedule. There are a number of ways this could be done, including:

• smaller instalments over a longer period
• a temporary payment holiday
• a mechanism under which payments resume when certain cash or profit thresholds are met

This is usually preferable to forcing the company into a position where it pays the sellers but damages its ability to trade, particularly as this would likely have a knock on effect on future instalment payments too.

A temporary pause may be appropriate where the issue is clearly short term. For example, if there is a delayed customer payment or temporary pressure on working capital. A more fundamental restructure may be needed if there is likely to be a long-term change to trading or profitability. In either case, the parties should document the variation properly and consider whether tax, accounting, trust law or company law advice is required.

Bank funding may be an option, but it is not always the answer as it may introduce higher interest costs and stricter repayment obligations than may be in place between the seller and EOT.

What if the debt can never be paid in full?

If the former owners are considering whether to write off all or part of the deferred consideration, they should take personal tax advice before doing so.
A write off could in some circumstances be regarded as a gift by them to the EOT, potentially subject to inheritance tax. There are ways to achieve this goal without creating that tax risk.

If they have paid capital gains tax (due on sales to an EOT from 26 November 2025 at a reduced rate of 12%), the tax will have been calculated on the full purchase price, even though the price is being paid in instalments. If it becomes impossible for the full sale price ever to be paid, overpaid tax can generally be reclaimed, but this will be determined by HMRC on a case-by-case basis and should not be assumed.

Key considerations for the trustees

When making any decisions to adjust the payment schedule, the EOT trustees will need to consider a range of obligations:

• The EOT trustees may have a contractual obligation to pay the deferred consideration, and any deferral or non-payment may have legal consequences.
• Many EOT arrangements require the company to retain a minimum cash level which cannot be breached without trustee or seller consent.
• The trustees also have duties under the trust deed and general trust law. In particular, the trustees must always act in the interests of the beneficiaries (the employees).

Therefore, it is key to balance all of these considerations. Looking at the short, medium and long-term impact of making a payment will be essential. If making an instalment would leave the company unable to meet payroll, pay suppliers or maintain essential working capital, the longer-term effect may be worse than seeking a deferral or variation.

Practical steps for EOT trustees, company directors and former owners

• Ensure regular financial information is provided to flag any potential financial bumps in the road which might impact on future payments
• Regularly update cash flow forecasts.
• Monitor distributable reserves, solvency and minimum cash requirements.
• Identify any risks to payment schedule as early as possible and address early
• Review the transaction documents before any payment is missed or varied.
• Consider whether a temporary payment holiday, revised instalment profile or longer-term restructure is most appropriate.
• Ensure all decisions are properly recorded.
• Take tax advice before materially amending any terms or writing off any deferred consideration.

A missed EOT seller payment is not uncommon. Nearly every company’s financial circumstances will regularly depart from what has been planned. It will often simply mean that the original payment agreement needs to be revisited.

The key is to act early, document decisions properly and balance the sellers’ contractual rights with the trustee’s duties to the employee beneficiaries and the company’s financial requirements.

How can Postlethwaite help?

If you are a former owner, EOT trustee or director of an employee-owned company and the agreed seller payment schedule is becoming difficult to maintain, an early review, with advice where needed, can help ensure clear alignment of everyone’s interests, preservation of flexibility, and risk reduction of unintended legal or tax consequences.

Our team can provide practical advice on choices according to the transaction documents, help ensure that trustees are clear on their duties and where needed help agree and document a revised payment structure that works for the business, the EOT’s employee beneficiaries and the former owners. Sometimes trustees or sellers may need to take their own advice.

Contact us for a no obligation discussion to find out how we can help.