Deferred Consideration: What It Is, Why It Exists, and How to Use It Properly in a Business Sale
- Tony Vaughan
- 23 hours ago
- 4 min read
In most business sales, especially those between £1 million and £10 million, the price paid is rarely a single lump sum on completion. Instead, the structure is usually made up of three elements:
Initial completion payment
Deferred consideration
Performance-based earn-out
Used well, these tools allow both parties to agree a fair deal that reflects today’s value and tomorrow’s potential. Used badly, they can become subtle price-reduction mechanisms that drain value from the seller and hand unnecessary leverage to the buyer.
This article explains what deferred consideration actually is, why it exists, how it works alongside earn-outs, and the difference between a structured, well-negotiated deal and a poorly-prepared one that quietly costs the seller a fortune.
1. What Deferred Consideration Actually Means
Deferred consideration is simply a portion of the sale price that is:
Agreed at the time of sale
Legally binding
Paid at a fixed future date or fixed schedule
It is not dependent on performance. It is not an earn-out. It is part of the original purchase price, just paid later.
Most deals include deferred payments for practical reasons:
To give the buyer breathing room on cashflow
To allow time for warranty and indemnity claims to flush out
To help the buyer reduce immediate borrowing
To bridge trust gaps where the buyer wants time to verify certain aspects of the business
In other words, deferred consideration exists because business deals need flexibility, and neither party usually gets 100% of what they want in one go.
2. Why Deals Combine Completion, Deferred Payments and Earn-Outs
A typical £1m–£10m SME deal often blends these three payment methods for logical reasons:
Completion Payment
This is the “real” cash buyers commit immediately. It reflects the secure, verified value of the business today.
Deferred Consideration
This covers short-term risks and adjustments, for example:
Warranty periods
Working capital true-ups
Verification of certain information
Transitional risks
It allows both parties to complete the deal while leaving room to resolve any early issues fairly.
Earn-Out Payments
These reward future performance and bridge valuation gaps. They are about future upside, not past performance.
This structure allows:
Sellers to maximise their overall proceeds
Buyers to manage cashflow and early risk
Both sides to agree a deal even when they value the business slightly differently
When used correctly, this is perfectly reasonable.
3. A Clear, Real-World Example (Win/Win Scenario)
Let’s take a realistic SME example.
Today’s business value
£1,000,000 based on historic performance.
Future expected growth over 24 months
Reasonably projected to deliver an additional £250,000 in value.
Instead of arguing endlessly over whether the business is worth £1m today or £1.25m in two years, the parties agree a structured deal:
1) Completion Payment
£850,000 on day one. The buyer secures the business, the seller secures the majority of value immediately.
2) Deferred Consideration
£75,000 after 6 months, £75,000 after 12 months
These payments allow time for:
Warranty periods
Accurate handover
Confirmation that no major issues were hidden
A smooth transition
They are not performance-based. They are guaranteed unless warranties are breached.
3) Earn-Out (Performance-Based)
£250,000 payable after 24 months if agreed growth targets are reached.
This reflects the future upside the seller believes in, and the buyer is willing to reward if the performance materialises.
This Is a Fair and Proper Use of All Three Tools
The seller receives £1.25m if the business does what both parties reasonably expect.
The buyer protects their risks.
Both sides share responsibility for the future.
Nobody is stitched up, and both have confidence in the outcome.
This is the model I see most commonly in well-run, professional, good-faith negotiations.
4. So Why Do Things Go Wrong? The Abuse of Payment Structures
Unfortunately, financially motivated acquirers and sometimes their buyside advisers, know that these tools can also be used as price-reduction levers.
Here’s how:
A. Deferred consideration quietly becomes a “discount reserve”
Payments that should be automatic become:
Conditional
Linked to minor targets
Delayed
Used as leverage for minor warranty disputes
A buyer can chip away at value long after the ink is dry.
B. Earn-outs weaponised to achieve unrealistic price reductions
If an earn-out is based on impractical or manipulated conditions, the buyer knows the seller will never receive the full amount.
C. Cashflow excuses that mask risk dumping
Some buyers use deferrals not to manage risk but to minimise their own financing obligations.
D. Overly broad warranty claim rights
Deferred payments provide an easy pot of money for buyers to raid through:
Ambiguous claims
Overstated issues
Slow responses
All of which can reduce what the seller receives.
E. Combining all three tools against the seller
A buyer can say: “It’s still a £1.25m deal.” But the real structure becomes:
Completion: £700k
Deferred: £150k (conditions added later)
Earn-out: £400k (set to nearly impossible targets)
Headline price stays the same. Actual proceeds collapse.
5. The Difference Between a Well-Negotiated Deal and a Poorly-Negotiated One
It’s usually this simple:
A well-negotiated deal
Clear, fair wording
Logical payment structure
Transparent risks
Reasonable earn-out terms
Deferred payments used honestly
Both parties incentivised
Seller confident in achieving full value
Buyer protected from genuine risks
Professional, predictable process
Minimal drama or conflict
A poorly-negotiated deal
Confusing or vague clauses
Buyer-favourable drafting
Earn-outs designed to fail
Deferred payments quietly conditional
Warranty clauses used as leverage
Seller carries disproportionate risk
Headlines look good, reality is very different
Disputes, tension and resentment
Significant loss of value for the seller
The financial difference?
Often six figures or more, plus unnecessary stress, frustration and wasted time.
6. Final Advice: Negotiate from Strength, or Don’t Negotiate at All
Here are the principles I give every client:
Never accept complexity you don’t understand.
Never sign an SPA with vague payment definitions.
Never allow deferred payments to become performance-based.
Never accept unreasonable earn-out conditions.
Never allow fear to push you into a weak structure.
And most importantly:
If you’re not happy with the deal, walk away. There are always other options.
A structured deal done properly can maximise value for both sides. A structured deal done badly can quietly remove a large portion of the price you thought you had secured.
If you want help reviewing, negotiating or sense-checking your proposed deal structure, get in contact today.