Deferred Consideration and Earn-Outs: Where Most of the Risk in a Sale Actually Sits
Very few sales of owner-managed businesses complete on an all-cash, pay-on-day-one basis. Most involve some element of deferred consideration — money payable later, sometimes fixed, sometimes contingent on the business hitting agreed targets after the seller has handed over control.
That structure solves a real commercial problem. It can bridge a valuation gap, or reassure a buyer who can’t fully price the business without seeing it run without the founder. But it also turns part of the sale price into a set of promises, and promises carry risk that a clean cash sale doesn’t.
Ascertainable versus unascertainable consideration
The tax treatment turns on a distinction that’s easy to overlook at the drafting stage: whether the deferred amount counts as “ascertainable” or “unascertainable” at completion.
An ascertainable amount is a fixed sum, payable on a fixed or determinable date. HMRC taxes it in full at completion, as part of the total disposal proceeds, even though the cash hasn’t arrived yet.
An unascertainable amount works differently. Genuinely contingent on future performance — a percentage of next year’s profit, say — it counts instead as the disposal of a separate asset: a right to future consideration. The seller values and pays tax on that right at completion, then runs a further calculation once they actually receive the payment.
Get this wrong at the drafting stage, and you create a real problem: tax falls due before the cash to pay it arrives. That’s a genuine cash flow issue, not just a technical one.
The commercial risk in an earn-out
The commercial risk runs alongside the tax risk. An earn-out only pays out if the business performs well after completion, by which point the seller has typically lost day-to-day control — over pricing, staffing, capital spending, even which customers to prioritise.
Earn-out disputes are one of the most common sources of post-completion litigation between buyer and seller. Almost always, either the parties didn’t define the metric tightly enough, or the buyer’s ordinary post-acquisition decisions — integrating systems, changing suppliers, redirecting sales effort — ended up shifting the very numbers the earn-out was meant to track.
Getting the structure right before signing
The practical safeguard is the same on both fronts: define the earn-out mechanism and the metric precisely, and give the seller clear post-completion protections, including a say over decisions that could affect the numbers. Do this before signing, not as a commercial afterthought bolted onto a tax-driven structure.
Frequently Asked Questions
How does the UK tax deferred consideration? It depends whether the amount is ascertainable or unascertainable. HMRC taxes an ascertainable amount in full at completion, since it’s fixed. For an unascertainable amount, the seller values it as a separate asset and pays tax at completion, then runs a further calculation once they actually receive the payment.
What is an earn-out in a business sale? A form of deferred consideration where part of the sale price depends on the business hitting agreed targets after completion, typically over one to three years.
Why do earn-out disputes happen? Most often, either the parties didn’t define the earn-out metric tightly enough, or the buyer’s normal post-acquisition decisions affected the very numbers the earn-out depended on.
How H&Hendricks Can Help
H&Hendricks reviews deferred consideration structures for both tax treatment and commercial protection before the parties agree terms, drawing on direct experience negotiating earn-out and deferred consideration terms for owner-managed clients.
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