Deferred consideration: Putting a price on protection

By Debbie King, head of corporate, Farleys

Very few sales of businesses and companies now proceed with the entire purchase price being paid in cash on completion.  

The parties will often agree a schedule of repayment for the deferred element of the price and whether or not there will be any interest payable on it.

However, the parties often overlook whether or not any security or other protections should be requested by the sellers to protect their position.  

This can be in the form of traditional security, such as a Debenture over all of the assets of the purchaser (if this is a company) or a Second Charge over any property owned by an individual purchaser.  

It can also take the form of restrictions in terms of what the business can and cannot do during the payout period without first obtaining the seller’s consent, so as to constrain the business from e.g. increasing salaries to its directors, paying a high level of dividends or committing to any large capital expenditure commitments whilst monies remain outstanding to the sellers.  

These restrictions can be removed lifted as soon as the deferred element of the consideration has been paid.   From the purchaser’s perspective having a deferred element gives a potential pot from which any future liability of the sellers (pursuant to any warranties or indemnities under the main sale agreement) can be set off against, rather than having to pursue the sellers directly for such losses.