Deferred consideration

Definition

Deferred consideration is a portion of the price for a business or asset paid after completion, sometimes fixed and sometimes contingent on future results (an "earn-out").

In plain terms

When buyer and seller disagree on value, deferring part of the price — payable if the business hits targets — bridges the gap and keeps the seller motivated.

Why it matters for your company

For a buyer, deferred consideration eases upfront funding but creates a future liability to plan for; for a seller it carries risk. It features heavily in MBOs and acquisitions. See enterprise value.

In practice

Picture a UK limited company acquiring a smaller competitor. The two sides agree the target is worth more if it retains its key clients and keeps growing, but the buyer is reluctant to pay fully for potential that hasn't yet been proven. Structuring part of the price as deferred consideration lets completion happen on terms both sides can live with, while leaving the harder question — what the business is really worth — to be settled once results are in.

For the buyer's finance team, this means budgeting for a liability that sits on the balance sheet but falls due later, often alongside ongoing trading cash flow rather than competing with it for funding on day one. For the seller, especially a departing director, it usually means staying involved for a defined handover period so the earn-out conditions can actually be met, which changes the flavour of the exit from a clean break to a longer transition.

Common pitfalls

The most frequent friction point is disagreement over how the earn-out targets are measured after completion, particularly where the buyer's own decisions — pricing changes, staff reallocation, integration into a wider group — affect the numbers the seller is being judged against. Sale agreements typically try to head this off with clear definitions of how the target business should be run during the earn-out period, but ambiguity here is a common source of later disputes.

A second pitfall is treating deferred consideration as if it were guaranteed cash. Because part of the price depends on future performance, directors on the receiving end should be cautious about relying on it for near-term planning, and lenders assessing a company's position will generally look at contracted, unconditional payments differently from contingent ones tied to an earn-out.