Making Deferred Consideration Work: An Earn-Out Checklist for UK Founders

Earn-outs are often presented as a simple compromise: the buyer pays part of the price now and the rest later if the business performs. In practice, the earn-out is not a handshake. It is a mini-contract inside the sale and purchase agreement, and its value depends less on optimism at completion than on definitions, controls and evidence.

For UK founders, the commercial logic is familiar. A buyer may be unwilling to pay the full headline price for a business whose future revenue depends on customer retention, a new product or the founder's continued involvement. Deferred consideration allows both sides to proceed. But unless the mechanics are drafted with care, the founder can find that the business performs, the buyer controls the numbers, and the payment never arrives.

Why earn-outs go wrong

The central difficulty is control. After completion, the buyer usually owns the company, appoints the board and decides how the business is run. The founder may remain as an employee or consultant, but influence is not ownership. If the earn-out depends on profit, revenue or another metric that the buyer can affect, the founder needs contractual protection rather than a general expectation of fair play.

Problems commonly arise from vague definitions, changes to accounting policies, unexpected central charges, delayed invoicing, reallocation of costs or a dispute about whether a particular item is exceptional. Each issue may look minor in isolation. Together they can move the earn-out out of reach.

Define the metric, not just the label

A phrase such as 'EBITDA' is not a definition. It is a starting point. The sale agreement should set out the precise calculation, including which costs are deducted, how central services are charged, how acquisitions or disposals are treated and whether accounting policies are fixed at completion or allowed to change.

Where possible, use a metric that is harder for the buyer to manipulate. Revenue, gross profit, recurring subscription income or achievement of specific project milestones may be more transparent than a profit measure subject to discretionary allocations. If profit is used, attach a detailed schedule showing the calculation and a set of locked accounting policies. State clearly that the buyer must not change those policies in a way that reduces the earn-out.

Control the calculation process

The founder should not be a passive recipient of a number after the event. The agreement should provide for a draft calculation, a defined review period, access to supporting records and a dispute process. An independent accountant or expert determiner is often preferable to litigation: the process is quicker, more private and focused on the mechanics rather than general allegations of unfairness.

Information rights matter. Monthly or quarterly management accounts, access to the relevant accounting system and copies of customer reports can allow the founder to spot problems early. These rights should be proportionate and subject to confidentiality, but they should not be so weak that the founder learns of a shortfall only when the earn-out period has ended.

Protect the business during the earn-out period

Buyers resist open-ended obligations, and understandably so. A founder cannot expect the buyer to run the business exactly as it was run before completion. However, it is reasonable to ask for covenants that the buyer will operate the business in the ordinary course, maintain the sales and marketing resources needed for the earn-out, avoid diverting customers or contracts to other group companies, and refrain from accounting changes designed to reduce the deferred payment.

Founders should also consider their own role. If continued employment is part of the deal, the employment terms, reporting lines and authority should be consistent with the earn-out assumptions. A founder who is expected to deliver growth without the authority to approve spending or pricing is being set up to fail.

Address payment security and acceleration

An earn-out is only as good as the buyer's ability and willingness to pay. Where the buyer is a newly incorporated company or a private equity-backed vehicle, a parent guarantee, escrow or charge may be appropriate. The payment timetable should be clear, including whether interest accrues on late payment and whether the buyer can set off other claims against the earn-out.

Acceleration events deserve attention. If the buyer sells the business, insolvency looms or the founder is dismissed without cause, the founder may want the remaining earn-out to become payable on a defined basis. Buyers will negotiate carve-outs, but the principle is worth raising before signing.

A founder's pre-signing checklist

Before completion, confirm that the agreement deals with:

• the exact metric, formula and worked example;
• the starting baseline and treatment of acquisitions, disposals and reorganisations;
• locked accounting policies and permitted adjustments;
• the buyer's operating covenants and information rights;
• the draft calculation, review and expert determination process;
• payment dates, security, interest and set-off limits;
• acceleration on sale, insolvency or termination without cause;
• the founder's role and authority during the earn-out period;
• tax treatment of the deferred consideration and any instalments;
• record-keeping and access after the earn-out period ends.

Tax advice should run alongside the legal drafting. The way an earn-out is structured can affect whether the consideration is treated as capital or income, and the answer may depend on the facts and the form of the agreement. UK founders should not leave that analysis until after completion.

The bottom line

An earn-out is not inherently unfair, and many buyers use them responsibly. But a founder should treat the deferred element as a separate commercial bargain that needs its own protections. Clear metrics, controlled calculations, information rights and a credible dispute mechanism turn a payment promise into something that can be tested and enforced. Without them, the founder is relying on goodwill long after the leverage of the sale has gone.