When buyer and seller disagree about value, a payment after completion may help them explore an agreement. But postponing the disagreement does not resolve it. The parties need to understand how the later payment will be determined, who influences the outcome and how the arrangement will operate after ownership changes. Those questions deserve attention while the commercial terms are still being negotiated.
Distinguish the payment structures
Deferred payment generally describes consideration payable later. An earn-out links some consideration to future performance or another agreed outcome. The precise terms matter, and your legal and tax advisers should assess the proposed arrangement. From a commercial perspective, start by asking whether the uncertainty concerns when payment occurs, how much will be paid, or both.
Consider a hypothetical sale where part of the price depends on next year's earnings. The seller may assume the business will continue operating as before. The buyer may plan to integrate it, change management or invest heavily. Unless those expectations are discussed, the parties may agree on the metric while disagreeing about the business decisions that will influence it.
Test the metric in practice
Ask your accountant to model how the proposed calculation behaves under different scenarios. What if revenue grows but margins fall? What if a major customer pays late? What happens when costs are shared with another business? The purpose is to identify assumptions that need commercial agreement and specialist documentation before the calculation becomes a source of conflict.
Avoid relying on labels such as revenue or profit without discussing how the relevant figures will be established. Consider the reporting information needed to understand the result and who will prepare it. A mechanism that appears straightforward in a short proposal can require significant administration when the business is being managed under a new owner.
Consider influence and visibility
If the seller remains involved, define the role, decision-making authority and expected time commitment. If the seller leaves, discuss how they will receive information about the payment calculation. The buyer also needs sufficient freedom to run the acquired business. The negotiation should recognise both interests rather than assume that either party can have unrestricted control without consequences.
For fixed deferred payments, discuss the commercial risk of non-payment and ask your lawyer about available protections. For performance-linked payments, discuss the possibility that the agreed amount may never become payable. These are different risks and should be considered separately when comparing offers or deciding which concessions are acceptable.
Compare complete outcomes
Assess the arrangement alongside cash at completion, continuing employment or consultancy obligations, tax treatment and transaction costs. A higher potential price may come with more uncertainty and a longer relationship with the buyer. Decide whether that suits your objectives. Ask advisers to explain the practical consequences clearly enough for you to compare alternatives.
Ardian Law helps buyers and sellers negotiate commercial payment arrangements and coordinate specialist input. If deferred consideration is central to your deal, call 02 8111 7700 to discuss the issues that need agreement before the transaction progresses.