Deferred Consideration

What Is Deferred Consideration?

Deferred consideration is any portion of the purchase price in an M&A transaction that is not paid at closing but is instead paid at a future date. It allows buyers to manage cash flow, reduce upfront risk, and align seller incentives with post-acquisition performance. For sellers, deferred consideration can provide tax benefits and signal confidence in the business’s continued growth.

Deferred consideration takes two primary forms: fixed deferred payments (paid on a set schedule regardless of performance) and contingent payments (paid only if the business achieves specified targets). Earnouts are the most common form of contingent deferred consideration.

Types of Deferred Consideration

Fixed Deferred Payments

The buyer agrees to pay a specified amount at one or more future dates, irrespective of the target’s post-closing performance. These are essentially instalments of the purchase price:

Payment	Amount	Due Date
Closing payment	$8,000,000	Closing
First deferred payment	$1,500,000	12 months post-closing
Second deferred payment	$1,500,000	24 months post-closing
Total consideration	$11,000,000

Fixed deferred payments function like vendor financing — the seller is effectively lending money to the buyer, secured by the buyer’s promise to pay. Sellers negotiate interest provisions, security packages, and acceleration clauses to protect against buyer default.

Contingent Consideration (Earnouts)

Earnouts tie deferred payments to the achievement of financial or operational milestones:

• Revenue targets — additional payments if the business achieves specified revenue thresholds
• EBITDA targets — payments linked to profitability metrics
• Customer retention — payments contingent on retaining key customer relationships
• Product milestones — in technology and pharmaceutical deals, payments triggered by product launches, regulatory approvals, or patent grants

Holdbacks and Escrow

A holdback retains a portion of the purchase price (typically 5-15%) in escrow for a specified period — usually 12-24 months — to cover potential indemnification claims. If no claims materialise, the holdback is released to the seller. Unlike earnouts, holdbacks are not performance-contingent; they serve as security for the buyer’s indemnification rights.

Vendor Loan Notes

The buyer issues promissory notes to the seller for a portion of the purchase price. Vendor notes are common in management buyouts and private equity transactions where the buyer’s financing capacity is limited:

• Typically subordinated to senior acquisition debt
• Interest rates above the buyer’s senior debt cost but below mezzanine rates
• Maturities of 2-5 years

Structuring Considerations

For Buyers

• Cash management — reduces the upfront cash requirement
• Risk mitigation — if the business underperforms post-closing, contingent payments are not triggered
• Seller retention — earnouts incentivise key sellers to remain engaged during the transition
• Financing flexibility — reduces the amount of third-party debt needed to fund the acquisition

For Sellers

• Tax deferral — in many jurisdictions, deferred payments allow sellers to spread capital gains tax over multiple years using installment sale treatment
• Price maximisation — sellers confident in the business’s prospects can accept a lower upfront price in exchange for a larger total consideration through earnouts
• Credit risk — the seller bears the risk that the buyer cannot or will not pay the deferred amounts

Accounting and Tax Treatment

Deferred consideration creates complexity in both accounting and tax:

• Accounting — contingent consideration must be recorded at fair value at the acquisition date under IFRS 3 and ASC 805, with subsequent changes in fair value recognised in the income statement
• Tax — the treatment varies by jurisdiction. In the US, installment sale treatment under IRC Section 453 allows sellers to defer capital gains recognition. In the UK, holdback consideration may be taxed on a “just and reasonable” apportionment basis

Disputes

Deferred consideration — particularly earnouts — is among the most litigated aspects of M&A. Common disputes include:

• Whether the buyer operated the business in a manner consistent with achieving the earnout targets
• Disagreements over the accounting methodology used to calculate performance metrics
• Whether the buyer deliberately frustrated the earnout by redirecting customers or resources

According to American Bar Association studies, approximately 65-70% of US M&A purchase agreements include some form of deferred consideration, with earnouts appearing in roughly 30% of private M&A deals.

APAC Context

Australia — deferred consideration in Australian M&A follows UK-influenced practices. The Australian Taxation Office provides specific guidance on the CGT treatment of deferred and contingent consideration, including the “look-back” mechanism for adjusting the capital gain when contingent amounts are ultimately determined.

India — deferred consideration in Indian M&A must comply with the Foreign Exchange Management Act (FEMA) regulations when cross-border elements are involved. The Reserve Bank of India restricts deferred payment structures involving foreign buyers, imposing timelines within which the full consideration must be paid.

Japan — earnouts and contingent consideration are less common in Japanese M&A compared to Western markets, partly due to cultural preferences for certainty in deal terms. However, their use is increasing in technology and healthcare acquisitions where valuation gaps between buyer and seller are common.

“Deferred consideration is the bridge that closes valuation gaps between buyers and sellers,” observes Daniel Bae, founder of Amafi. “In APAC cross-border deals, the key challenge is structuring deferred payments that comply with local foreign exchange and tax regulations while preserving the economic intent of both parties.”

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