Business sales: deferred consideration

There are no strict rules regarding the structure of the consideration for a business sale.

It is not uncommon for an element of the proceeds from the business sale to be deferred and paid at a later date.

Such deferred payments broadly fall into two categories being:

  • Simple deferred consideration.
  • Earn-outs.

This article only considers deferred payments made in cash, additional considerations are required for other forms of consideration.

Simple deferred consideration

Simple deferred consideration is merely a deferral of part of the proceeds to a later point in time.

Typically, the deferred element of the consideration will be paid between 6 – 24 months after completion, but the payment may be reduced if any warranty or indemnity claims are made against the sellers in that time.

Some basic requirements may be included for the payment to be made to the sellers, such as the sellers remaining in employment with the business for a period of time after completion.


Earn-outs are more complex structures that can take many forms.  These normally include post completion turnover or profit targets which need to be achieved for a full payment to be made to the sellers.

Typically, the earn-out amount will be capped at a maximum payment that is payable if post sale performance targets are fully met, but the actual payment will depend on the success at achieving the agreed performance targets.

Earn-outs require extensive and complex drafting in the legal documentation and are often paid out at less than the maximum value achievable.


The tax position between simple deferred consideration and earn-outs can be very different as discussed below.

Simple deferred consideration taxation

From a tax perspective, in most cases simple deferred consideration payments will be subject to capital gains tax and benefit from any available reliefs such as Business Asset Disposal Relief (BADR)  – a 10% tax rate.  The tax being due by the 31 January following the tax year within which the disposal is made.

Earn-out taxation

The tax of earn-outs can be complex and will depend whether the consideration is considered to be ‘ascertainable’ (all information to calculate the amount is known at the time of the sale) or ‘unascertainable’ (an element of the consideration cannot be calculated at the time of the sale).

An example of unascertainable consideration is a payment that is based on the future stock market price of quoted shares.  The leading tax case on unascertainable consideration, Marren V Ingles (1980), was in relation to this scenario but more mundane structures can also be treated this way.

Unascertainable consideration may be partly taxed by reference to the year of the business sale and partly by reference the date of the future deferred consideration payment, the amounts taxable in later tax years will not qualify for BADR.  Planning can be undertaken to change the timing of the tax if beneficial.

Earn-outs also have an added risk as they often require the sellers to continue working for the business and to improve the performance of the business post sale.  As a result, they can, at least partially, be considered to be employment income and taxable at much higher income tax rates.


Negotiation of the sale consideration for business sales should always consider the tax implications at the early stages.  The tax cost if this is done wrong can be significant and specialist advice should be obtained from the start of the negotiation process.

Ballards LLP’s transactional team has experience dealing with business sales in a range of sectors and can provide a full deal process service.

For more information on deferred consideration please contact Martin Adams at


This article has been prepared for information purposes only. Formal professional advice is strongly recommended before making decisions on the topics discussed in this release. No responsibility for any loss to any person acting, or not acting, as a result of this release can be accepted by us, or any person affiliated with us.

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