How earn-outs and deferred consideration can shape deal structures in a company sale

A company sale is not shaped by headline value alone. The way consideration is structured can have a significant influence on risk, certainty and how value is ultimately realised.

Earn-outs and deferred consideration are common features in company sale transactions. While they can introduce additional complexity, they can also provide a practical way to bridge valuation gaps, manage risk and align both parties around the future performance of the company.

Used appropriately, these mechanisms can help a transaction move forward where buyer and seller expectations, assumptions or risk positions are not fully aligned.

What earn-outs and deferred consideration mean

Both earn-outs and deferred consideration relate to how the purchase price is paid, but they are not the same.

Deferred consideration is an agreed element of the price that is paid after completion. The amount may be fixed, although payment is delayed and usually set out within an agreed schedule. Depending on the transaction, certain conditions may also apply.

An earn-out links part of the consideration to future performance. Payments are typically dependent on the company achieving agreed targets over a defined period, such as revenue, profit or another commercial measure.

In both cases, the headline valuation may remain unchanged, but the timing, certainty and conditions attached to payment can differ significantly.

Why structured consideration is used

Earn-outs and deferred consideration are often used where buyer and seller have different views on value, risk or future performance. Rather than preventing a transaction from progressing, structured consideration can give both parties a framework for moving forward.

From a buyer’s perspective, these structures can reduce upfront risk, particularly where a significant proportion of the company’s value is linked to future growth, customer retention or post-completion trading.

From a seller’s perspective, they may help support a higher total consideration than would otherwise be achievable through an entirely upfront payment. This can be particularly relevant where the seller has confidence in the future prospects of the company and is prepared to share an element of that risk.

These structures can become especially relevant where the buyer is being asked to place value on expected performance as well as historic results. They may also arise where revenue visibility is less predictable, customer relationships are closely linked to the seller, or trading conditions in the wider market are changing.

What sellers and buyers need to consider

For sellers, a higher headline value may be appealing, but not all of that value may be received at completion. Part of the consideration may be delayed, conditional or dependent on future results. Sellers should therefore look closely at how achievable the payment conditions are, when payments are due and what could affect the final amount received.

Sellers may also need to consider their ongoing role in the company. In some transactions, an earn-out may require continued involvement for a defined period after completion. This can help support continuity, but it also means the seller’s ability to influence performance may remain important. For shareholders weighing up different routes, understanding the distinction between a full sale or partial exit can provide useful context when assessing the structure of an offer.

For buyers, earn-outs and deferred consideration can provide additional comfort when assessing an acquisition opportunity. Linking part of the consideration to future results can help align payment with actual performance and reduce the risk of overpaying.

However, buyers also need clarity. The structure must be commercially workable, measurable and capable of being managed after completion. If the terms are unclear, they can create unnecessary complexity and increase the risk of disagreement.

Why the detail matters

Although the principles of earn-outs and deferred consideration are relatively straightforward, the detail of the structure is critical.

For earn-outs, the parties usually need to agree several key points, including:

• the relevant performance targets
• the measurement period
• the reporting process
• the payment mechanics
• how performance will be assessed
• what assumptions apply
• what happens if circumstances change after completion

For deferred consideration, the payment schedule, timing, conditions and security of payment should be clearly understood. Even where the amount is fixed, uncertainty can arise if the terms are not properly documented.

Control is another important consideration. If a seller’s future payment depends on post-completion performance, they will usually want to understand how much influence they will retain over decisions that could affect that performance. Buyers, in turn, will need the ability to manage the company effectively after completion.

These details can have a material impact on how value is realised. Clear documentation, careful negotiation and experienced advice can help reduce the risk of misunderstanding later in the process.

Balancing value, risk and certainty

Earn-outs and deferred consideration are not inherently problematic. In many transactions, they provide a practical way to bridge differences in expectations and support a deal structure that works for both buyer and seller.

The key is understanding what is being agreed. Sellers should consider not only the total value of the offer, but also when that value is paid, how certain it is and what conditions need to be met. Buyers should ensure that any structure is measurable, commercially justified and aligned with the company’s future performance.

When approached with clarity, these mechanisms can help transactions progress where a fully upfront cash offer may not reflect the objectives or risk position of both parties. However, the terms need to be negotiated carefully, clearly documented and assessed in the context of the overall transaction.

If you are considering selling your company and want to understand how different deal structures could affect value, risk and certainty, arrange a consultation with KBS Corporate.