Earn-outs and deferred consideration: how sellers get paid.

What is the difference between an earn-out and deferred consideration?

Deferred consideration is part of the agreed price paid at a later date, on fixed terms. It is a timing and credit question: the amount is known, and the risk is whether the buyer pays it. An earn-out is part of the price paid later only if the business meets defined performance targets after completion. It is a credit risk, plus a measurement risk, plus a control risk, because the results being measured are produced by a business the seller no longer owns. Both are legitimate features of UK company sales. They should not be assessed as though they were the same instrument, and a headline price that combines them tells a seller very little on its own.

Why buyers ask for an earn-out

Earn-outs appear where the parties disagree about the future rather than the past. The usual triggers are recent rapid growth the buyer is unwilling to pay a full multiple for, forecast profit that is not yet evidenced, revenue concentrated in a few customers, or a business where the departing owner holds the relationships. The structure lets a buyer pay for performance if it materialises and lets a seller retain the possibility of a higher total. It also transfers a defined risk from the buyer to the seller, which is the reason it is offered.

How is an earn-out calculated?

Most earn-out disputes are definitional rather than commercial. The measure must be specified precisely: which metric, calculated under which accounting policies, before or after group management charges, before or after integration costs, and how shared services, intra-group transfer pricing and central overhead allocations are treated. Revenue-based measures are simpler to verify and harder for a buyer to manipulate, but buyers resist them because revenue can be bought at the expense of margin. Profit measures are more commercially aligned and far more exposed to accounting treatment. Where a profit measure is used, a worked example applying the definition to the last full year's figures should be attached to the agreement itself, so that the parties are agreeing to an arithmetic result and not to a phrase.

Structure the payment curve as well as the measure. A single threshold — full payment above target, nothing below — creates a cliff, which is the shape most likely to produce litigation over a marginal shortfall. Sliding scales, part-payment at a floor and catch-up provisions across periods spread that risk and make small variances commercially survivable. The same logic applies to length: one to three years is the ordinary range, two the most common, and each additional year multiplies the exposure to the buyer's decisions rather than to the seller's.

How can a seller protect an earn-out?

Protection has three components: conduct, information and enforcement. On conduct, the business should be ring-fenced during the earn-out period so its results can be measured at all — run in the ordinary course, without diversion of opportunities to other group companies, without restructuring that affects the measure, and without changes to accounting policy. Where the seller remains involved, operational authority over pricing, recruitment, marketing spend and capital expenditure should be recorded in writing; an earn-out the seller cannot influence is a wager on someone else's management. Acceleration provisions should apply on a change of control, on dismissal other than for cause, and on material breach by the buyer.

On information, monthly management accounts and access to the underlying records throughout the period, with an agreed independent expert to determine disputes rather than a court. On enforcement, security for deferred elements: escrow, a parent company guarantee, a charge, interest on late payment, and clarity about which entity in the buyer's group carries the obligation. A promise from a newly incorporated acquisition vehicle with no assets is not consideration in any meaningful sense.

Should I accept an earn-out?

The workable test is to assess the offer on the assumption that no contingent element is ever received. If the completion payment alone is acceptable against the seller's objectives, the earn-out is genuine upside and the negotiation is about protections. If it is not, the seller is being asked to finance part of their own sale and to work for the buyer while doing so. The proportion matters for the same reason: the larger the contingent share of the total, the more the arrangement resembles employment with a bonus scheme than a disposal, and the more heavily it should be discounted when comparing offers.

Two situations warrant particular caution. The first is an earn-out where the seller is not staying, since the results being measured are then entirely in the buyer's hands. The second is an acquisition by a group intending immediate integration, because integration and clean measurement are difficult to reconcile — if the acquired business is to be merged into existing operations within months, a revenue measure or a fixed deferred sum is usually more honest than a profit-based earn-out that both parties know will be hard to compute.

How are earn-outs taxed in the UK?

Treatment is not automatic and is a specialist area. Broadly, an unascertainable future right to consideration is itself valued and brought into charge at the time of the original disposal, with a further gain or loss arising when the amount is actually received; ascertainable deferred consideration is treated differently again. Whether reliefs are available on the deferred element cannot be assumed, and whether a payment is treated as consideration for shares or as employment income depends on how it is structured and on what the seller must do to earn it — a point of real substance where the seller remains employed during the period. Advice should be taken before the structure is agreed in heads of terms, because the drafting drives the treatment and is difficult to revisit later.

How deferred consideration is secured

Deferred consideration is simpler than an earn-out and is still frequently under-protected. The amount is fixed, so the only real question is whether it arrives. Escrow — the money held by a third party and released on the agreed dates — removes almost all of that risk and is resisted by buyers precisely because it does. A parent company guarantee is the common compromise where the acquiring entity is a subsidiary, and its value depends entirely on the parent's balance sheet rather than on the wording. A charge over the shares or over specific assets gives the seller a recovery route, though enforcement is slow and the practical value depends on what ranks ahead of it.

Two further points are commonly overlooked. Interest should run on deferred amounts, both because the seller is providing credit and because an interest-free deferral quietly reduces the real value of the headline price. And set-off rights need attention: a buyer entitled to deduct warranty claims from deferred consideration has an incentive to find claims, so the circumstances in which set-off is permitted should be narrow, defined, and ideally limited to claims that have been agreed or determined.

Managing the earn-out period itself

Sellers focus on negotiating the earn-out and give far less thought to living through it, which is where most of the difficulty actually occurs. The business will be run inside a new group with its own reporting calendar, procurement arrangements, pricing governance and approval thresholds. Decisions that took the owner an afternoon may now require a business case. None of that is bad faith; it is ordinary corporate behaviour, and it can still depress the measured result. The protection is procedural: agree in advance which decisions remain with the seller, the spending limits that apply, the reporting pack and its timing, and a standing meeting at which variances are discussed while they can still be addressed.

Record-keeping during the period matters more than it appears. Where a buyer's decision — a delayed recruitment approval, a change in supplier terms, the reallocation of an account to another group company — reduces the measured result, the seller's claim depends on being able to show what happened and when. Contemporaneous notes and email confirmations are unglamorous and are the evidence on which any later determination will turn. The same applies to the accounting policies: request the earn-out accounts on the agreed basis each period rather than waiting for a single computation at the end, when disagreement is expensive and the relationship is already strained.

Comparing two offers with different structures

Consider a business where an all-cash offer of £4m completes in ten weeks, against a structured offer of £5.2m comprising £3m at completion, £1m deferred over two years and £1.2m contingent on profit targets across three years with the seller remaining full-time. The structured offer is 30% higher on paper. Measured on cash at completion it is 25% lower. Measured on the assumption that no contingent element pays, it is £4m gross before considering credit risk on the deferred tranche and three further years of the seller's working life. It may still be the better deal — for a seller who wants to continue, believes the targets are conservative, and negotiates strong conduct covenants. It is simply not a 30% improvement, and treating it as one is the most common error a seller makes at this point.

Mistakes that recur

Accepting a target defined by reference to a forecast the seller did not build. Agreeing a profit measure without specifying management charges. Leaving the earn-out to be documented in the sale agreement rather than settled in heads of terms. Assuming an oral assurance about continued autonomy will hold once the buyer's own management is in place. Taking no security over deferred amounts because the buyer is a substantial group, without checking which entity in that group is contracting. And comparing offers on headline totals rather than on risk-adjusted proceeds — which is the mistake all the others depend on.

Settle the terms before heads of terms are signed

The measure, the period, the payment curve, the conduct covenants, the information rights, the dispute mechanism and any security should be agreed in outline in the heads of terms, not deferred to the sale agreement. Anything left open at that point will be negotiated during exclusivity, when the seller has stopped talking to other buyers and the leverage has moved. The same discipline applies to the surrounding mechanics in cash-free, debt-free and working capital adjustments, which determine how much of the completion payment actually arrives.

Common questions about earn-outs

How often do earn-outs pay out in full? There is no reliable public UK dataset on this and we will not quote a figure we cannot source. Assess the individual deal on its mechanics and its protections.

Can I refuse an earn-out? Yes, and some buyers will proceed at a lower all-cash price. Deciding in advance which of those outcomes suits your circumstances is one of the more useful pieces of preparation a seller can do.

Where to start

Deferred elements are decided at the offer stage, so the useful preparation happens before then — see selling a business for how a competitive process is run and heads of terms and deal structure for where these terms are fixed. Further reading is collected in the deal structure Insights archive.

This page is general information about the law and tax treatment of business sales in the United Kingdom as at 9 August 2026. It is not personal advice, and the treatment of any particular transaction depends on how the deal is structured, the shareholders' own circumstances, the status of the company, the legislation in force at completion and the interpretation of your own accountant and solicitor. Take advice on your own facts before acting.