Buying a business: Consideration

Deferred Consideration

Deferred Consideration is the term used to describe 'any money which you don’t pay on the day of the business purchase'. This may be because you have simply agreed with your seller that payments will be made in instalments or it may be because some part of the purchase price is dependent on a particular event.

Your seller is likely to want security that the money will be paid. Typically, the security requested ranges from a charge over your property through to a simple acknowledgement of the debt owed set out in the contract which they can then sue on if need be.

Another right we would look to include in the contract would be the right of ‘set off’. When acting for a purchaser, we draft warranties into the contract which the seller gives. The right of set off means that, if you discover something to be untrue in the warranties given then you can deduct the amount you lose as a result from the amount you still owe your seller.

Conditional Consideration

This is not a legal term but a description of the scenario in which you agree with your seller that a certain sum will be payable upon a particular event occurring.

To give an example, we were involved in selling a business which was based around a major contract to the extent that, if the contract were to be lost, the business would be worth considerably less. The business was not a company and therefore the only possible sale was an asset sale which would involve renewing the contract. We therefore agreed that a percentage of the purchase price would be held back by the buyer until the contract was renewed. To protect our client, we then built in clauses dealing with such things as:

  • how much they would get if the contract was renewed but on slightly less favourable terms; or
  • what would happen in the event that the buyer was the reason the contract was not renewed.

Earn-out clause

This covers the scenario in which part of the purchase price is linked to the future performance of the business. It is normally linked to profits but could also be linked to other financial measures such as turnover or net assets. It generally involves the seller working for the business after the transfer date, normally for a specific purpose (e.g. because they have specific contacts which you want to make use of). Then, if the business performs over and above the agreed minimums, your seller will get a percentage of the extra profit.

This sounds like a clause to benefit sellers but there is a benefit to buyers in that it may allow you to pay a lower price for the business at the outset and, if the business does not perform as well as the seller promises it will, then no further payment will be made.