Deferred consideration

Deferred consideration structures allow part of the purchase price in a business sale to be paid after completion. From the buyer perspective, the advantage is a reduction in risk, bridging valuation gaps and retaining expertise.

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. Historically, the sectors most often associated with where deferred consideration are :-

• Technology companies - where future value depends on product development or market adoption.

• Professional services - client retention and team stability are crucial.

• Manufacturing - product development cycles are long.

• Healthcare - regulatory approvals or clinical trials affect value.

• Property-related businesses - development projects affect future value.

Benefits for buyers and sellers

For buyers, a reduction in initial capital requirement, performance security, retaining seller engagement and continued contribution to business.

For sellers, the potential to negotiate for higher total consideration, tax planning opportunities and the possible opportunity to influence and benefit from future success.

Fixed deferred payments

Apply where agreed amounts are paid at agreed future dates. 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. May be secured or unsecured: Security improves seller protection but 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 their flexibility and alignment of interests. May be linked to performance-based payments, whether :-

• EBIT/EBITDA targets most common

• Revenue thresholds where profits temporarily suppressed

• 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.