Short answer
When you sell a business, the price is often paid in parts. Some is paid at completion; the rest may be paid later as fixed deferred payments, as an earn-out that depends on how the business performs, or held back as a retention against possible claims. Each part carries different risk for you, so compare offers by how much you receive, when, and on what conditions, not only by the headline price.
The four common parts
- Payment at completion: paid on the day the sale completes. The most certain part of the price.
- Fixed deferred payments: set amounts paid on set dates after completion, for example over two or three years. The amount does not depend on performance.
- Earn-out: further payments that depend on the business hitting agreed targets after the sale, such as profit or turnover. The amount is not certain at completion.
- Retention or escrow: part of the price held back, often in a separate account, for a period in case the buyer has a claim under the sale agreement.
Why buyers use them
Spreading payments helps buyers fund the purchase from the business's future income, shares the risk if customers or staff leave after the sale, and keeps the seller involved during the handover. For sellers, a structured price can mean a higher total than an all-cash offer, but with more of it depending on the buyer and the business.
Questions to ask before you sign
- How much is paid at completion, and how much later?
- Are later payments fixed, or do they depend on performance?
- For an earn-out: exactly how is the target measured, using which accounts, and who controls the decisions that affect it?
- What happens to later payments if the buyer sells or merges the business, or if you are asked to leave early?
- How are later payments protected? Common protections include a charge over the shares of the company being sold, or money held in escrow.
- Are there interest or late-payment terms?
- How and when is each part taxed? The rules for fixed and contingent payments differ, so ask your accountant.
How Richmonds structures offers
Richmonds' offers are normally a mix of a payment at completion and further payments over the following years. Any payments due after completion are part of the agreed price and written into the sale contract. We explain how every part works, and agree it with you, before anything is signed. See how it works.
Questions owners ask
What is the difference between deferred consideration and an earn-out?
Deferred consideration is a fixed amount paid later on set dates. An earn-out is an amount that depends on the business meeting agreed targets after the sale, so it is not certain at completion.
How can I protect deferred payments?
Ask your solicitor about protections such as a charge over the shares of the company being sold, money held in escrow, and clear terms on what happens if the buyer sells the business or misses a payment.
Should I accept an earn-out?
It depends on how much of the price it covers, how clearly the targets are defined, and how much control you keep over the things that affect them. Take advice from your accountant and solicitor before agreeing.
Sanjeev Desour is the founder of Richmonds, which buys UK water hygiene, water treatment and fire safety businesses from owners who want to retire. He founded IGNITE Academy in 2014 and runs the IGNITE Group of companies. LinkedIn
Sources
This guide is general information, not legal, tax or financial advice, and it is not an offer to buy any business. It reflects the rules and announcements known on the "last reviewed" date above. Tax rules and rates change, and announced changes may be altered before they become law, so take advice from your own accountant and solicitor before you act. Richmonds accepts no liability for decisions made on the basis of this guide. See our website terms.