Both happen, but seller financing is common in Employee Ownership Trust transitions: the trust buys the company over time out of future profits, with the owner paid through a note instead of a single up-front check. External financing (bank debt or mission-aligned lenders) can supplement or replace it to give the owner more cash at closing. The right mix depends on the company's cash flow, how much liquidity the owner needs up front, and what financing is available.
Financing an Employee Ownership Trust (EOT) transition means funding the trust's purchase of the company from the selling owner. Two broad approaches are used, often in combination:
- Seller financing. The owner sells to the trust and is paid over time from the company's future profits, typically through a promissory note repaid over roughly five to ten years. This is common because it needs little or no outside capital up front and lets the company fund the buyout from its own cash flow. The trade-off is that the owner does not receive all the proceeds at closing.
- External financing. Senior bank debt or mission-aligned lenders (some specialized in employee-ownership transitions) can lend the trust money to pay the owner more at closing. This gives the owner liquidity sooner but adds debt and lender requirements. Deals also reach for junior layers when needed, such as mezzanine or subordinated debt and non-voting preferred equity, and government loan-guarantee programs can enhance credit.
In practice many EOT deals blend the two — some outside financing for up-front liquidity, with the balance seller-financed over time.
Which mix is right depends on the company's cash flow and debt capacity, how much cash the owner needs at closing versus over time, and what lenders are available. This is worth modeling with an advisor before committing to a structure.