Deal Structuring
Deferred consideration and earn-outs: making a deal work for both sides
Headline price matters, but the timing, conditions and security of payment can be just as important.
A price is not a payment structure
Imagine a business valued at £1,200,000. One buyer offers the whole amount at completion. Another offers £700,000 on completion and £500,000 over three years. Those offers are not economically identical, even before considering the security and conditions attached to the later payments.
I look at three separate questions: what is the business reasonably worth, how much can be paid at completion, and what can the business sustainably afford afterwards. For me, a deferred structure must be supportable from the acquired company’s own cash flow, not just attractive on a spreadsheet.
Deferred consideration is different from an earn-out
Fixed deferred consideration is an agreed amount payable later, subject to the contract. An earn-out is contingent: some of the price becomes payable only if specified future results or conditions are achieved.
An earn-out can bridge a genuine difference of opinion about future earnings. But it should not become a substitute for agreeing what is being measured, who controls the business and how disagreements will be resolved.
Stress-test the cash, not just the EBITDA
Suppose the business generates £300,000 adjusted EBITDA, but needs £60,000 of replacement capital expenditure, £35,000 of additional working capital and £70,000 of annual debt service. That leaves £135,000 before tax and other obligations in this simplified illustration.
A promised £180,000 annual deferred payment would therefore need another source of cash or a different schedule. A headline acquisition can appear affordable and still become a cash-flow problem immediately after completion.
How I would approach this in practice
I would work backwards from sustainable cash flow and test downside scenarios. For earn-outs, I would also define the accounting measure, control of management decisions, exceptional adjustments and dispute process.
I would use the evidence to identify the key commercial assumptions, test alternative outcomes and decide what could realistically be done next. The point is not to produce a precise-looking number in isolation, but to reach a conclusion that can be explained and acted upon.
Protect both parties through clear drafting
I would want the heads of terms to state the payment dates, calculation basis, information rights, security, treatment of disputes and what happens if performance falls short. The practical detail matters: an apparently agreed structure can unravel when its conditions and obligations are examined properly.
For an earn-out, I would also examine accounting policy consistency, allowable adjustments, management control and exceptional items. The objective is a workable transaction, not a mechanism that creates an argument two years later.
General educational guidance only. Outcomes depend on the facts, evidence and transaction terms of each business. These are practical analytical perspectives, not legal, tax or regulated investment advice.