Headline sale prices can be misleading. Many deals for owner-managed businesses are not all cash on completion; part of the value is paid later, through deferred consideration or an earn-out. Understanding how these work helps you judge whether an offer is really as strong as it first appears.
Deferred consideration
Deferred consideration is simply part of the agreed price paid at a later date, often over one to three years. It reduces the buyer’s risk and can bridge a gap in expectations, but it means you are, in effect, extending credit to the buyer. The certainty of those future payments matters as much as the amount.
Earn-outs
An earn-out links part of the price to the business’s future performance, hitting profit or revenue targets after completion. Used well, it lets both sides share in upside they could not agree on up front. Used carelessly, it becomes a source of dispute, especially if you no longer control the levers that drive the targets.
What to watch for
- How much of the value is at risk, and for how long
- Whether targets are realistic and clearly defined
- How much control you retain over hitting them
- What happens if the buyer changes the business
Structure is not a detail; it is part of the price. A lower headline number paid in cash can be worth more than a higher one tied to uncertain future performance. Understand the structure before you celebrate the number.
