In short
- Most business sales combine a payment on completion with amounts paid later.
- Fixed deferred consideration is a set amount paid on set dates. An earn-out depends on how the business performs after the sale.
- For an earn-out, the definitions matter most: what is measured, how it is calculated and what the buyer may or may not change.
- Ask how deferred payments are secured and what happens if the buyer sells or restructures the business.
- Take tax advice early. Deferred and contingent payments can be taxed differently from cash at completion.
When you sell a business, the headline price is only part of the story. How and when it is paid can matter just as much. This guide explains the common structures in plain terms.
Payment on completion
The amount paid on the day the deal completes. It is usually adjusted for debt and working capital at completion, as described in our guide to how event production companies are valued.
Fixed deferred consideration
A set amount paid on set dates after completion, for example in equal instalments over two or three years. The amount does not depend on how the business performs. Deferred consideration allows a buyer to fund part of the price over time, and often allows a higher overall price than a single payment would.
Earn-outs
An earn-out is a payment that depends on the business reaching agreed targets after the sale, typically over one to three years. Targets are usually based on revenue, gross profit or EBITDA.
Earn-outs are common where buyer and seller see the value differently, or where the business depends on relationships the seller is helping to hand over. They can work well, but they need careful drafting.
What to look for in an earn-out
- A clear measure. Exactly what is being measured, and on which accounting policies.
- Realistic targets, based on the business's actual track record.
- Protections for how the business is run. For example, limits on moving clients or costs elsewhere in the group during the earn-out period.
- What happens if things change, such as the buyer selling the business, merging it or ending your involvement early.
- A process for resolving disagreements about the figures, such as referral to an independent accountant.
Retentions
A retention is part of the price held back, sometimes in a separate account, to cover possible warranty claims for a period after completion. Warranty and indemnity insurance is sometimes used as an alternative.
Security for deferred payments
Because deferred amounts are paid in the future, sellers rightly ask how they are protected. Security for deferred consideration is commonly provided over the shares or assets of the business being sold. Your solicitor will advise on what is appropriate for your deal.
Tax
Deferred and contingent payments can be taxed differently from cash paid at completion, and the timing of tax may not match the timing of payment. Whether reliefs such as Business Asset Disposal Relief apply to each element also depends on the structure. Take advice from your accountant before agreeing heads of terms, not after.
Balancing the structure
A larger completion payment gives certainty. A larger deferred element can increase the total price and lets the buyer share some risk with you. There is no single right balance. The best structure is one that both sides understand clearly and believe is fair.
How Ignite Group structures deals
Our offers typically combine a payment on completion with deferred consideration. We set out the structure in writing in our indicative offer, explain how it is funded, and agree the balance with you and your advisers. You will not find late changes to the structure in our process.
Written by Sanjeev Desour, founder of Ignite Group. About SanjeevThis guide is general information about UK practice, not legal, tax or financial advice. Take advice from your own accountant and solicitor on your circumstances.