The ABCs of Deferred Consideration
What Is Meant By Deferred Consideration?
By the term “deferred consideration”, we actually mean a part of the purchase price which can be paid by the purchaser in the forthcoming days, after closing. The purchase price will be negotiated depending on the target firm’s fair market valuation. The amount of consideration is determined in all forms and the payment terms are figured out.
The negotiated price is affected by a number of factors. It is feasible to make payment in the form of stocks, payment or assumption of liabilities, cash, debt, or future payouts. There is going to be a payment in the form of equity upfront in the buying company or a promise for paying cash based on the success of turnover targets or profit targets. Payments for the future are agreed upon for the subsequent issues:
• Form of payment
• Balloon payment
• Payment interval
• Restrictive plus affirmative covenants
The purchaser is allowed by deferred consideration to defer the cost of acquisition. A deferred payment aids in getting the deal through in times of poor liquidity. Nevertheless, risk is faced by the seller and he makes an attempt to secure a high payment upfront, at times even in return for a lowered cost. A collateral or bank guarantee might be sought by a seller whereby it is not possible for any assignation to happen without the consent of the seller. At times, the purchaser can set off deferred consideration against any indemnity to be paid by the seller. In case the deferred consideration is liable to some specific conditions being fulfilled prior to making the payment, the parties will agree to a payment mechanism. It will be possible to place the funds in an account and also released based on the terms contracted. Sellers do have a vested concern for the company in the future as contingent or deferred payment.
Coping With Non-payment Of Deferred Consideration
It will be better if a seller can perform more due diligence on the ability of the purchaser to pay off the consideration. Once the purchaser is operating the business, the position of cash might not be much hopeful in the long run. In the worst situation, there is no adequate cash for settling the deferred consideration.
What Can The Sellers Do For Helping Themselves
It is imperative for a seller to figure out how to provide the consideration and also what assets does the purchaser possess that can be utilized as security?
Making The Buyer’s Directors Personally Liable
It is essential for the seller to look through the assets of the company and take into consideration the buyer’s personal assets. In the long run, the directors of the buyer can be personally responsible in case the company doesn’t fulfill its obligations for deferred consideration. However, it is imperative for the seller to ensure that intentions are reflected by the sale documentation.
Fortifying Priority Payment
It is essential for the seller to confirm in the sales documents that, as a debtor, it does have the first priority over the consideration in case of winding up or administration.
Preventing The Purchaser Setting Up A Fresh Business In The Competition
We have often heard a purchaser to default on the payment of deferred consideration and allow the business to go into administration. The purchaser might plan for setting up a new business just like the business it purchased often taking clients, staff, and suppliers. There is a decent possibility to stop this type of behavior provided the documents are clear.