Deferred consideration is a term specific to selling a business. It allows the purchaser of the business to defer some or all of the cost of the acquisition.
Deferred consideration often happens with a view to helping a deal to be completed.
There are a number of reasons for deferred consideration, including;
- The buyers access to the sufficient amount of funds.
- The buyer may not feel that the price reflects the true value of the company and is keen to see if profits match up to an estimation following the purchase.
- The buyer may want to to keep the seller on board to provide an input into the business.
Payment can be in installments, dependent on future profits.
Future payments can be agreed upon for some of the following:
- Payment intervals
- Balloon payments
- Form of payment
- Restrictive covenants
According to Crest Legal a common deferred payment scenario is:
“In many negotiations for sale of a business, the buyer will ask to pay for the business in instalments. An initial amount will be paid at completion of the sale, and after completion, one or more further payments will be made. The element of the purchase price which is paid after completion of the sale is called the ‘deferred consideration’.
The timescale between the completion of a business sale and payments of the deferred payment may be several months or even years.
The seller may wish to create a sale agreement to receive immediate payment of the deferred consideration in particular circumstances, for example;
- If an instalment is missed.
- If the buyer is approaching insolvency. This allows the seller to make an immediate claim against the buyer rather than having to wait till a future date.
- If there is a guarantor for the the deferred consideration but the guarantor is approaching insolvency.
- If a buyer or guarantor is a company and the company gets sold. This affects the financial condition of the buyer.
Is deferred consideration a loan?
According to vertuscapital.co.uk a deferred consideration is considered a loan and as such, it is not uncommon for purchasers to pay interest on the deferred consideration.
Is deferred consideration right for me?
As the seller, this option could result in you getting more money (eventually) for your business.
It’s a good idea to seek independent legal advice to ensure that you minimise any risk and uncertainty.
For example you don’t want to accept credit risk from a purchaser and will need proof of access to funds before accepting a deferred consideration.
Consider the impact of a deferred consideration on your existing staff, clients and suppliers.