Deferred consideration

What is deferred consideration and when is it an issue?

Deferred consideration is typically an issue for negotiation with business sales. Buyers commonly demand that part of the purchase price is held back on completion and payable at later dates. There are a lot of different ways this can happen and where agreed in principle, negotiating the precise terms is vital for both sides, but especially the seller.

From the buyer perspective, the advantage is a reduction in risk, bridging valuation gaps and retaining expertise. Most sellers are not so keen on deferred consideration but if compelled to accept, there is potential to negotiate for higher total consideration, tax planning opportunities, security for the held back payments and the possible opportunity to influence and benefit from future success.

We are highly experienced in advising buyers or sellers in business sale transactions. Our experience means we understand how to assist with negotiations on a suitable deferred payment arrangement, balancing competing interests and resulting in clear and enforceable agreements.

Fixed deferred payments

This is most basic form of deferred payment, where agreed amounts are simply postponed, to be paid at agreed future dates. The seller knows exactly what they'll receive and when, providing certainty but less upside potential. Can be linked to interest rates and compensates seller for time value of money while providing buyer payment flexibility.

Sellers may seek to negotiate security which improves seller protection but this can be problematic for buyer financing.

Earn outs

The most common form of deferred consideration in UK private company sales, particularly in the £2m-£20m range, due to flexibility. Earn outs are commonly linked to performance, whether :-

• EBIT/EBITDA targets most common.

• Revenue thresholds.

• Customer retention rates for service businesses.

• Specific business milestones in tech/healthcare.

Earn outs usually have a 2-3 year period with annual or cumulative targets and typically include protection mechanisms like:

• Ringfencing of business operations

• Clear accounting policies and calculations

• Anti-avoidance provisions

• Expert determination for disputes

Vendor loan notes

• Debt instruments issued to seller - effectively converts seller into creditor.

• Interest-bearing with fixed redemption dates - provides regular income stream to seller.

• Can be transferable or secured - offer seller potential exit flexibility.

Protections for sellers who agree deferred consideration

These can include, as negotiated :-

• Parent company guarantees - protection against buyer default.

• Bank guarantees or escrow - third-party security for payments.

• Charges over assets - security over specific business assets.

• Put options - right to sell any remaining stake on pre-determined terms.

• Anti-avoidance provisions - prevent buyer manipulating performance measures.

• Information rights - access to financial information and trading updates.

• Operational controls - restrictions on changes that could affect earn-out.

• Acceleration triggers - early payment triggered on change of control or breach by the buyer.

Contact our corporate team to discuss how we can help whether you are buying or selling a business.