Deal structures when selling a business: how you actually get paid

When sellers picture the sale of their business, most imagine a single lump sum landing in their bank account on completion day. That does happen, but it's not the only way deals work, and for a significant number of SME transactions, it's not even the most common.

Understanding deal structures matters because the headline price and the money you actually receive can be quite different things. A £2 million deal with £1.5 million on completion and a £500,000 earn-out over two years is not the same as a £1.8 million deal paid in full on day one. The structure affects your risk, your cash flow, your tax position, and your life for months or years after the sale.

What does a typical SME deal look like?

There's no single template, but most deals in the £500,000 to £5 million range involve some combination of the following:

• Initial consideration. The amount paid on completion. This is your guaranteed money. In most SME transactions, the initial consideration makes up between 70% and 90% of the total deal value.
• Deferred consideration. A fixed amount paid after completion, usually in instalments over six to twenty-four months. The amount is agreed at the outset and isn't dependent on future performance. You know what you're getting and when.
• Earn-out. A variable payment linked to the future performance of the business after the sale. Typically tied to revenue, gross profit, or EBITDA targets over one to three years. You only receive the earn-out (or the full earn-out) if the targets are met.
• Retention. A portion of the price held back for a fixed period to cover any warranty claims or liabilities that emerge after completion. Usually released after twelve to twenty-four months if no claims arise.
• Seller financing. Where you effectively lend part of the purchase price to the buyer, who repays it over an agreed period with interest. This is more common in smaller deals where the buyer can't secure full bank financing.

A deal might include one of these elements, or several in combination. The structure is always negotiable, and the right structure depends on your priorities, the buyer's circumstances, and the nature of the business.

Why don't buyers just pay cash?

Sometimes they do. But there are legitimate reasons why a buyer might propose a structured deal rather than a clean cash purchase.

• Risk sharing. If the buyer is concerned about certain aspects of the business (client concentration, owner dependence, a recent dip in performance), they may want to share that risk with you by tying part of the price to future outcomes. This isn't unreasonable. If you're confident in the business, an earn-out aligned with achievable targets can actually result in a higher total price than a conservative all-cash offer.
• Financing constraints. Most SME acquisitions are funded through a combination of the buyer's own capital, bank debt, and sometimes investor backing. If the buyer can't fund 100% of the price from these sources, seller financing or deferred payments bridge the gap. This is particularly common for individual buyers and smaller trade acquirers.
• Alignment of interests. Some buyers, particularly private equity-backed ones, use earn-outs to keep the seller motivated during the transition period. If you're staying on for twelve to twenty-four months to hand over the business, an earn-out tied to performance during that period aligns your interests with theirs.
• Tax planning. The timing and structure of payments can affect the tax position for both parties. Spreading payments across tax years, or structuring certain elements as consultancy fees rather than purchase price, can be beneficial but needs careful professional advice.

How do earn-outs work in practice?

Earn-outs are the element of deal structure that generates the most confusion, the most disputes, and the most regret. They can work well, but only if they're designed carefully.

A well-structured earn-out has clear, measurable targets based on metrics you can influence. It defines exactly how performance will be measured, who prepares the accounts, and what happens if there's a disagreement. It gives you enough operational control during the earn-out period to actually achieve the targets. And it has a realistic timeframe, typically one to two years.

A poorly structured earn-out has vague targets that the buyer can manipulate through accounting decisions, operational changes, or cost allocation. It measures performance on metrics you can't control after the sale. And it runs for so long that you're effectively still running the business years after you thought you'd sold it.

The most common earn-out disputes we see involve:

1. Changes to the business post-sale. The buyer restructures, reallocates costs, or makes operational changes that affect the earn-out metrics. If you're measured on EBITDA and the buyer adds £200,000 of central overhead charges to your business unit, your earn-out disappears even though the underlying performance hasn't changed.
2. Accounting disagreements. How revenue is recognised, how costs are allocated, and how exceptional items are treated can all affect the earn-out calculation. Without clear definitions agreed upfront, these become arguments after the fact.
3. Loss of control. After the sale, you're no longer the owner. You may have a consultancy role or a management position, but the buyer controls strategic decisions, investment, staffing, and pricing. If those decisions negatively impact the earn-out targets, you have limited recourse unless the earn-out agreement specifically protects against this.

The lesson from all of this is: if you agree an earn-out, the detail of the earn-out agreement matters at least as much as the headline number. Your solicitor and accountant should be deeply involved in negotiating the mechanics.

What about deferred payments?

Deferred consideration is simpler than an earn-out because the amount is fixed. You know you're getting £200,000 in twelve months regardless of how the business performs.

The main risk with deferred payments is counterparty risk: what happens if the buyer can't pay when the time comes? If the buyer runs into financial difficulty, or if they've loaded the acquisition with debt and the business underperforms, your deferred payment may be at risk.

There are ways to protect yourself. The deferred amount can be secured against the assets of the business or the buyer's other assets. It can be placed in an escrow account. Or it can be structured as a loan note with clear terms around default and enforcement. Your solicitor should advise on the appropriate protections for your situation.

One thing to be aware of: deferred payments may have different tax treatment from upfront consideration, depending on the structure. The timing of when you pay CGT on deferred amounts depends on whether the amount is ascertainable (fixed) or unascertainable (contingent). This is a technical area where your tax advisor's input is essential.

How do retention clauses work?

A retention is a portion of the purchase price held back after completion, typically in a joint solicitor's account or escrow, to cover any warranty or indemnity claims the buyer might make.

Retentions are common and not unreasonable. If the buyer discovers a liability after completion that was covered by a warranty in the sale agreement (an undisclosed tax liability, a contractual issue, an employment claim), the retention gives them a fund to draw on without having to pursue you through the courts.

Typical retentions range from 5% to 15% of the purchase price, held for twelve to twenty-four months. The amount and duration are negotiable. From your perspective, you want the retention to be as small as possible, held for as short a period as possible, and released automatically if no claim is made within the retention period.

What should I push for in the negotiation?

Every seller's priority should be to maximise the guaranteed element of the deal: the money that hits your account on completion, with no conditions attached.

Beyond that, a few principles worth keeping in mind:

Understand the real value of the deal, not just the headline. A £2 million offer with a £500,000 earn-out over three years is not worth £2 million to you today. Discount deferred and contingent elements for risk and time value. A £1.7 million all-cash offer might actually be the better deal.

If you agree an earn-out, negotiate the protections. Insist on clear, independently verifiable metrics. Get contractual protections against the buyer making changes that undermine your ability to hit the targets. And make sure the earn-out period is as short as you can negotiate, ideally twelve months, not three years.

Secure deferred payments. If any part of the price is deferred, ensure there are meaningful protections in place: escrow, security over assets, or personal guarantees from the buyer's principals.

Get specialist advice. Deal structure is the area where professional advice has the most direct impact on your financial outcome. A good solicitor and accountant will more than earn their fees by negotiating structure that protects your position.

What should I do next?

If you're in the early stages of thinking about a sale, understanding deal structures helps you set realistic expectations about what you'll actually receive and when. It also helps you evaluate offers more effectively when they come, comparing not just the headline number but the certainty, timing, and risk profile of each proposal.

Our free valuation calculator gives you an indicative range for your business. If you'd like to talk through what a realistic deal structure might look like for your specific situation, James is happy to have a confidential conversation.