Deferred Consideration
Part of the purchase price paid after completion, often tied to future business performance or time-based milestones.
Full Definition
Deferred consideration is any part of the purchase price that is payable after the completion date. It allows buyers to spread payments and can bridge valuation gaps between parties.
Types of deferred consideration: 1. Fixed deferred payments: Set amounts payable on specified future dates 2. Earn-out: Payments contingent on future performance targets 3. Vendor loan notes: Debt instruments issued to the seller 4. Escrow/retention: Amounts held back pending warranty claims or adjustments
Common reasons for deferred consideration:
- Bridge valuation expectations
- Retain seller involvement and alignment
- Cash flow management for buyer
- Risk sharing on uncertain revenue streams
- Seller confidence in business prospects
UK tax considerations:
- CGT may apply when consideration becomes ascertainable
- Earn-outs with uncertain amounts have complex tax treatment
- Loan notes may be structured for tax deferral
- Employment-related consideration taxed as income
Seller protections:
- Security over assets or shares
- Personal guarantees from buyer principals
- Acceleration clauses on buyer default
- Information rights to verify earn-out calculations
Related Terms
Earn-out
Contingent payments to the seller based on the business achieving specified future performance targets.
Completion
The legal transfer of ownership when all conditions are satisfied and the transaction formally closes.
Purchase Price
The total consideration paid by the buyer to acquire the target business or its shares.
Vendor Loan Notes
Debt instruments issued to the seller as part of the purchase price, representing deferred payment obligations.