Sold… But Not Yet Paid: Understanding Earn-Outs

It’s increasingly rare for a business sale to be a single lump sum, paid on the day.

Many deals now include an element of deferred payment — sometimes called an earn-out — where part of the price is paid later, often depending on how the business performs after the sale.

This can work well for both sides. It lets a buyer manage risk. And it can bridge a gap where seller and buyer disagree slightly on what the business is worth.

But it comes with a genuine complication. You may end up being taxed on money before you’ve actually received it, depending on exactly how the deferred payment is structured. This article explains why, and what to watch for.

Why Buyers Propose Deferred Payment

Put yourself in the buyer’s shoes. They’re about to hand over a large sum for a business they’ve only seen from the outside. Even after due diligence, some doubts remain. Will the key clients stay? Will profit hold up once the founder leaves?

Deferred payment answers those doubts. The buyer pays part of the price now and the rest later, if the business delivers. That way, the buyer shares the risk with the seller.

Sellers sometimes welcome the idea too. Suppose you believe the business is worth more than the offer on the table. An earn-out lets you back that belief. If the business performs, you collect the higher price.

In other words, deferred payment can close a valuation gap that would otherwise kill the deal. That’s why it’s so common.

Two Kinds of Deferred Payment

Not all deferred payments work the same way. For tax, the key question is whether the amount is fixed or depends on the future.

Fixed payments. The buyer agrees to pay a set sum on a set date, say £500,000 in twelve months. Tax advisers call this “ascertainable” consideration, because you know the amount at completion.

Contingent payments. The amount depends on future performance, such as a percentage of next year’s profit. Tax advisers call this “unascertainable” consideration, because nobody knows the final figure at completion.

The distinction sounds technical. However, it changes the tax result completely.

How HMRC Taxes a Fixed Payment

For a fixed deferred payment, HMRC generally counts the full amount as part of your sale price at completion. You pay Capital Gains Tax on the whole sum in that tax year, even though part of the cash arrives later.

Think about what that means. The sale completes, and you receive £2 million. Another £500,000 is still to come. Yet your tax bill covers all £2.5 million, so you must fund the tax on the deferred part from cash you already hold.

In some cases, instalment rules can ease the strain by letting you pay tax in stages. Your accountant can tell you whether they apply to your deal.

How HMRC Taxes a Contingent Payment

Contingent payments follow a different path. At completion, your right to receive future payments counts as a separate asset. You value that right, and you pay tax on that value straight away.

Later, when payments actually arrive, a second calculation follows. You compare what you receive against the value you used at completion. A further gain or a loss results.

This approach has two awkward effects. First, you pay tax on an estimate, before you know the real outcome. Second, a later loss doesn’t simply refund the earlier tax. Whether and how you can use it depends on the rules, so never assume it will.

A Simple Illustration

Consider an example. The numbers are simplified, and they ignore reliefs and allowances.

An owner sells her company for £2 million upfront, plus an earn-out worth up to £1 million, depending on profit over two years. Her adviser values the earn-out right at £500,000 at completion. She therefore pays tax on £2.5 million of sale value in the year of sale.

Two years later, profit disappoints. The earn-out pays only £200,000. She paid tax on a £500,000 value but received £200,000. A loss arises, yet it doesn’t automatically refund what she paid earlier.

Now flip the outcome. Say the earn-out pays the full £1 million. A further gain arises on the extra £500,000, and she owes more tax then.

Either way, the tax arrives before, or separately from, the cash. That’s the heart of the problem.

The Cash Flow Trap

Many owners focus on the sale price and overlook this timing gap. Yet it can create real hardship.

Imagine paying tax on money you haven’t received. You may need to dip into your upfront proceeds, or even borrow. If the buyer later fails to pay, you’ve lost twice: once on the missing money and once on the tax.

So model your after-tax cash flow, year by year, before you accept a deferred structure. Don’t rely on the headline number.

Reliefs You Could Lose

Tax reliefs add another layer. Business Asset Disposal Relief (BADR) can cut your rate on a qualifying sale. From 6 April 2026, the rate is 18%, compared with 24% for higher-rate taxpayers on most gains.

The relief has conditions, and they apply at the point of sale. How you structure deferred payments can affect whether later amounts still qualify. A poorly drafted deal might push part of your price outside the relief.

The lifetime cap matters too, and the Budget on 28 October 2026 has changed it. BADR currently covers the first £1 million of gains across your lifetime. For qualifying disposals from 6 April 2027, the Chancellor announced that this halves to £500,000. The 18% rate is unchanged.

That makes earn-outs more sensitive. A large deferred element can use up your allowance, or spill beyond it, and with a lower cap that is more likely. The timing of the sale also matters now, because disposals before 6 April 2027 keep the £1 million limit. How later earn-out payments are treated against the lower limit should be confirmed once the legislation is published, so don’t assume your structure will be covered.

These are announcements rather than law, so check the final rules before you act. Because the stakes are high, check the relief position before you sign. Fixing a structure after completion is rarely possible.

The Commercial Risks

Tax isn’t the only danger. An earn-out also depends on the business performing after you’ve handed over control.

Consider what changes after completion. The buyer may integrate systems, change suppliers, redirect sales effort, or cut costs. Each decision can affect the numbers your earn-out measures. Yet you may have no say in any of them.

Disputes follow often. Earn-outs are among the most common causes of post-sale legal fights. Usually, the parties didn’t define the metric tightly enough, or the buyer’s choices distorted the figures.

There’s also credit risk. A promise to pay later is only as good as the person making it. If the buyer runs into trouble, your payment may disappear.

How to Protect Yourself

Careful drafting reduces most of these risks. Ask your advisers to cover these points:

• Define the earn-out metric precisely, and spell out exactly how profit or revenue is calculated.
• Keep the earn-out period short, because shorter periods mean less exposure.
• Seek a say over decisions that could affect the numbers.
• Ask for security, such as a guarantee or money held in escrow.
• Secure clear reporting rights, so you can see the figures that drive your payment.
• Agree a dispute process in advance. Expert determination or mediation beats court.
• Check the tax at each stage, and model every likely outcome.

None of these steps kills a deal. Instead, they make sure both sides understand what they’re agreeing to.

Compare Offers Properly

When you compare offers, don’t just look at the headline price. A £5 million offer with a large earn-out isn’t automatically better than £4 million paid upfront.

Instead, estimate the real value of each one. Allow for the delay, because money later is worth less than money now. Allow for the risk that the earn-out underpays. Then subtract the tax you’ll owe, and think about when you’ll owe it.

Often, the “lower” offer wins once you do this. Sometimes it doesn’t. Either way, you decide with open eyes.

Questions to Ask Before You Agree

Work through these with your advisers when a buyer proposes deferred payment:

• Is the deferred amount fixed or contingent?
• When will I owe tax on each part, and how will I fund it?
• Could the structure put my Business Asset Disposal Relief at risk?
• How will the earn-out be measured, and who controls the figures?
• What happens if the buyer sells the business or changes direction?
• What security backs the buyer’s promise to pay?

Clear answers show quickly whether the structure works for you.

Take Advice Early

Plan earn-outs before you agree heads of terms, not after. Once you sign, the structure is hard to change. Early advice, by contrast, lets you negotiate terms that suit your tax position.

A good adviser will model several structures, spot reliefs at risk, and help you push back on weak terms. That conversation costs little compared with a mistake worth tens of thousands of pounds.

The Bottom Line

The size of your sale price matters less than when and how you actually get paid. A high headline price with a complicated earn-out can be worth less, after tax, than a lower price paid upfront. Earn-outs need careful tax planning, not just careful negotiating.

How H&Hendricks Can Help

Structuring deferred consideration and earn-outs properly is exactly the kind of detail worked through as part of H&Hendricks’ Preparing for Sale service.

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Ashley Bancroft is a founding Partner of H&Hendricks. A qualified Chartered Accountant, he also holds an MBA from the University of Chicago Booth School of Business and specialises in finance, strategy and entrepreneurship, with particular focus on value creation.