When you sell your business, it’s easy to focus on the headline number; what you see as the “sale price.” But the way you actually receive that money can have a significant impact on what you end up with in your bank account, especially after tax. One increasingly common feature in business sale agreements is deferred consideration, where some of the purchase price is paid at a future date, rather than in a single lump sum at completion.
While deferred consideration can be a useful tool to bridge valuation gaps and align interests between buyer and seller, it comes with important tax implications that every entrepreneur should understand. Here’s what you need to know, with practical guidance from The Exit Roadmap by Chris Spratling.
1. What Is Deferred Consideration?
Deferred consideration simply means you receive part of the sale proceeds later, often subject to certain conditions:
– Fixed Deferred Payment: Paid on a future date, regardless of future business performance.
– Earn-Out: Payment is contingent on the business meeting certain performance targets post-sale (e.g., hitting a specific profit or revenue goal).
It’s an increasingly common way for buyers to manage risk and for sellers to potentially “top up” their total exit value.
2. When Is Tax Due on Deferred Consideration?
Capital Gains Tax (CGT) on a business sale is generally due in the tax year the sale completes, not necessarily when you receive the cash.
– For fixed deferred payments (where the right to payment is unconditional), HMRC usually treats the entire consideration, including the deferred element, as if you received it at completion. You’ll be taxed on the full gain up front, even if part of the payment will only reach you years later.
– For contingent deferred payments (earn-outs), the position is more complex. If the exact amount is unknown, the initial tax charge is based on a “best estimate” of the amount you expect to receive. Adjustments are made in later years if the actual earn-out differs from the estimate.
Action Step: Consult your tax adviser early, as getting the right calculation and managing cash to pay the tax due can be challenging.
3. Risks to Watch Out For
– Non-payment or underperformance: If you pay tax up front on deferred or contingent payments that ultimately aren’t received, you may have to reclaim overpaid tax or face a loss.
– Time value of money: Paying tax on money you haven’t yet received can hit your cash flow hard.
– Changes in CGT rates: If tax rates rise after completion, further receipts may be taxed at a higher rate if not properly structured.
Tip: Always ensure deferred or contingent amounts are clearly documented, and negotiate security or guarantees where possible.
4. Planning Strategies to Minimise Tax Pain
– Consider structuring some deferred payments as genuine earn-outs: This may enable more accurate, phased tax treatment.
– Use Business Asset Disposal Relief (BADR), where eligible, to reduce CGT, plan carefully as timing and structure can affect qualification.
– Negotiate payment schedules: Align instalments with your personal tax planning and cash flow needs.
5. Get Advice Early And Document Everything
Tax treatment of deferred consideration is complex and can change based on deal specifics and evolving HMRC guidance. Early planning with your accountant or tax adviser is essential.
– Create a clear record of how deferred payments will be calculated, when they’re due, and under what circumstances you may forfeit them.
– Build protections into your sale agreement to cover scenarios where deferred payments are at risk.
Final Thoughts: It’s Not Just What You Sell For, It’s What You Keep
Deferred consideration can help close deals and boost your exit value, but it must be managed carefully to avoid unexpected tax bills or cash shortfalls.
Your Exit Starts Here
If you’re wondering whether you’re truly ready to sell, don’t leave it to chance. Take the Exit Readiness Survey today at www.chalkhillblue.org/exitreadiness-survey and get a clear picture of where you stand, and what to do next.
Looking for the complete roadmap to a successful exit? Order The Exit Roadmap by Chris Spratling on Amazon – a practical, step-by-step guide for ambitious entrepreneurs ready to maximise value, minimise stress, and exit on their own terms.
For more insights and real-world advice, follow Chris Spratling on LinkedIn. Start your journey to a successful exit with clarity and confidence.
