Deferred consideration in M&A is a payment arrangement in which the buyer of a company pays the seller of the company at a later date after the initial transaction has been completed. This may be done as a way to reduce the cost of the purchase or to better tie the payment to the future performance of the company.

A lot of factors determine the actual negotiated price with deferred consideration. Payment might take the form of cash, debt, liability assumption or payment, stocks, or future rewards. There will be an initial payment in the form of equity in the purchasing firm or a pledge to pay cash based on the attainment of profit or turnover targets.

The following items are subject to future payments:

• Interest
• Period between payments
• payment by balloon
• Payment method
• Collateral/security
• Covenants that are both restrictive and affirmative

Deferred consideration enables the buyer to postpone the acquisition expense. A deferred consideration mechanism aids in completing the transaction during times of low liquidity. The vendor takes a risk, though, and works to get a sizable up-front payment, sometimes even in exchange for a lower price. 

A seller may request collateral or a bank guarantee that prohibits any assignment without the seller’s permission. The buyer may occasionally offset postponed payments against indemnities due by the seller. 

The parties decide on a payment method if the consideration is conditional on a number of things happening before payment may be made. If agreed-upon terms are followed, the money may be deposited in an account and released. Due to deferred or contingent payments, sellers have a stake in the company’s future.

Do you know the ins and outs of deferred consideration in M&A?

If you are looking to acquire another business, understanding deferred consideration can help you make sure that your M&A deal is successful. 

Get the knowledge you need and make sure your due diligence is complete with our comprehensive guide on deferred consideration.

Take advantage of deferred consideration today by learning more about it with our guide!

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