When selling a business, many owners expect to receive the full purchase price when the deal completes. However, we often see buyers asking sellers to accept part of the price at a later date through deferred consideration or an earn-out.

These arrangements can help buyers and sellers agree a deal where there is uncertainty about the business’s value or future performance. However, they also mean that part of the purchase price is dependent on future events, creating additional risks for sellers.

Deferred Consideration vs Earn-Outs

Deferred consideration is where part of the agreed purchase price is paid after the deal has completed. On “fixed” deferred consideration terms, the seller is generally entitled to receive that payment regardless of how the business performs after the sale.

An earn-out links part of the purchase price to the future performance of the business. Additional payments are only made if agreed targets are achieved during a set period after completion. Those targets may be based on revenue, profit, customer retention or other business milestones.

Why are the mechanisms used?

Deferred consideration and earn-outs are common because they help bridge gaps between buyer and seller expectations. They are often used where:

  • economic conditions make future performance harder to predict;
  • buyers have less cash available to pay upfront; or
  • the target is a fast-growing business which is difficult to value.

While these structures can increase the overall value of a deal, sellers should remember that any payment due after completion carries additional risk.

The key risks for Sellers

The most obvious risk is that some of the purchase price may never be received.

With fixed deferred consideration, sellers are relying on the buyer’s ability to make future payments. If the buyer experiences financial difficulties, recovering outstanding sums may be challenging.

Earn-outs can introduce further uncertainty. Once the sale has completed, the buyer will usually control the business and its day-to-day operations. Decisions made after completion may affect whether earn-out targets are met. Disputes can also arise if the targets or payment calculations are unclear.

Protecting your position

Before agreeing to deferred consideration or an earn-out, sellers should ensure:

  • the payment terms and targets are clearly defined;
  • the method for calculating payments is agreed in advance and clearly set out in the transaction documents;
  • they have considered security, guarantees and other protections against missed future payments; 
  • they have access to relevant financial information during any earn-out period; and
  • the agreement includes protections and adjustments to limit the effect of the buyer’s actions on any earn-out.

If you are considering selling your business, or have been presented with a deal involving deferred consideration or an earn-out, our Corporate team can help you understand the risks, negotiate appropriate protections and maximise the value of your transaction. Please contact the Corporate & Commercial department by emailing info@bhwsolicitors.com, or by calling 0116 289 7000.


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