Deferred Consideration: Key Considerations for Sellers

Monday, 16 February 2026

Deferred consideration remains a common feature of M&A deals in the current cycle. With valuation gaps persisting and financing costs elevated, buyers increasingly seek to defer part of the purchase price – either through fixed instalments (i.e., non-contingent) or milestone or performance‑linked earn‑outs (i.e., contingent) – to bridge pricing expectations and manage risk. Properly structured, these mechanisms can help close deals. But, if poorly structured, they can materially erode value for sellers.

Why deferred consideration is commonplace

Earn‑outs are widely used to bridge valuation gaps where buyers and sellers cannot agree a price but are willing to apportion risk so total consideration is linked to future financial or operational targets. They facilitate a more accurate (and, arguably, fairer) valuation of a target and enable both parties to share in the upside of the future performance of the target. Where the seller remains in the business post-completion, this engenders an alignment of incentives and allows a buyer to continue benefiting from the seller’s expertise, relationships and knowledge.

Non‑contingent deferred consideration, by contrast, is usually driven by buyer funding constraints at the time of completion rather than valuation uncertainty.

Risks for sellers agreeing deferred consideration

• Credit risk: Once completion occurs, a seller awaiting non-contingent deferred sums risks the buyer not paying. Simple enforcement may be of limited value, especially if the buyer becomes insolvent/bankrupt.
• Loss of control: After completion, the buyer controls operations and may, in the absence of any agreed restrictions, restructure or divert resources in ways that reduce the likelihood of hitting targets.
• Accounting and calculation disputes: Earn‑out mechanisms are inherently complex and often subjective, making them fertile ground for disputes. Sellers are disadvantaged in this regard, as the accounts used to calculate earn-outs are typically prepared by the buyer’s accountants.

Negotiating earn‑out structures: pitfalls to avoid

Common pitfalls include:

• Time horizon: Sellers typically prefer shorter earn‑out periods (one to two years); buyers often push for longer. Duration can directly impact how earn-outs are calculated and the forms of seller protection which can be employed.

• Performance metrics:
o Not calibrating metrics or targets which are befitting of the target (e.g., a profitability-based earn-out may not best suit a target defined by recurring revenue, such as a SAAS business).
o Not fully understanding the relevant metrics or targets underpinning the applicable calculation(s) – whether revenue, profitability or market share based – and how the component parts may be gamed by either party.
o Not getting credit for target sales made into or by the wider group of the buyer or for any upsales for the buyer’s group made by the target.

• Structure of payment: Sellers not understanding ‘all or nothing’ earn-outs – if a target is missed, there is no payment. Tiered earn-outs may be more appropriate.

• Caps and collars: Agreeing these might sound sensible on one level, however, they have the effect of limiting the full potential of an earn-out for a seller.

• Seller protections: not including enough parameters around what the buyer can and cannot do post-completion (see below).

• Seller defaults: not understanding the interaction of transaction documents and the consequences of default by a seller under any of them on their earn-out (e.g., leaver provisions).

• Buyer set-off rights: Permitting wider than necessary set-off rights to the buyer can endanger earn-out payments.

• Corporate events: If the buyer sells the business during the earn‑out period, the sale and purchase agreement (SPA) should specify how the earn‑out is calculated or accelerated.

Seller protections

Sellers should negotiate operational covenants requiring the buyer to run the business in the ordinary course and not take steps intended to frustrate the earn‑out. It may also be appropriate to request veto rights over certain key decisions.

Where their continued involvement is necessary to deliver targets, sellers should secure defined post‑completion roles, responsibilities and authority levels.

Information rights are critical. Agreements should mandate detailed periodic reporting, with access to books, records and supporting schedules so sellers can verify calculations.

Security for payment

Security can materially improve recovery prospects. Common protections include:

• Escrow accounts: These offer the strongest protection for sellers, with cash physically ringfenced, but ties up buyer cash.
• Parent guarantees: Particularly useful when the purchasing entity is a non-trading company, but only as good as the guarantor’s credit.
• Harder security: This could take the form of a charge over the shares of the target sold (or an option to buy back the target) or a debenture over the target.
• Letter of credit or asset security: Effective but can add cost and complexity.

Practical seller strategies at deal outset

Practical steps include:

• conducting reverse diligence on the buyer’s financial strength to assess credit risk;
• modelling earn‑out outcomes under different financial or operational scenarios;
• attaching worked examples to the SPA; and
• taking into account early any relevant accounting, tax, regulatory and financing considerations.

Final thoughts

Deferred consideration is not inherently problematic. In many transactions it is the mechanism that makes a deal possible. But it shifts risk forward in time—and usually onto the seller.
While every deal is different, sellers who achieve full value are rarely those who negotiate the highest payment on completion. They are the ones who negotiate the most robust deferred consideration protections before signing.

Authors

Christopher Allen is Head of the Corporate Team and Alex Willis is an Associate in the Corporate Team at Rosenblatt Law.

christopher.allen@rosenblatt.law
020 4614 7122

alex.willis@rosenblatt.law
020 4614 7145
https://www.rosenblatt.law

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