Summary
- Deferred consideration allows a buyer to pay part of the purchase price after completion, either in fixed instalments or linked to future performance targets.
- Sellers face increased risk under deferred payment structures and should ensure the share purchase agreement includes clear payment terms, acceleration clauses, default interest provisions, and appropriate security.
- Stamp duty in Australia is generally calculated on the total consideration, including deferred amounts, so the structure should be considered early in the deal.
- This article is a plain-English guide to deferred payments in share sales for Australian business owners, prepared by LegalVision, a commercial law firm.
- LegalVision specialises in advising clients on corporate transactions, including share sales and deferred consideration structures.
Tips for Businesses
Agree payment dates, amounts, and security arrangements before signing. Include acceleration and default interest clauses in your share purchase agreement. Factor deferred amounts into your stamp duty calculations early. Raise these points at the heads of terms stage to avoid disputes later.
When selling a company, buyers may seek to defer part of the purchase price instead of paying it all at completion. Deferred consideration may be payable on a future date, in instalments, or upon certain events. While this can facilitate a transaction, it also shifts risk to the seller. This article explains how deferred consideration works and the key legal issues to consider.
Deciding on Your Sale Valuation and Structure
The first step in any share sale is agreeing on the valuation. You must then decide how and when the buyer will pay, whether the price is fixed or adjustable, and whether security or set-off rights apply.
Some buyers will pay the full purchase price at completion, while others may seek deferred payments or link part of the price to future performance. The appropriate structure will depend on the parties’ commercial objectives, funding and risk allocation, with tax considerations also playing an important role.
What Are Deferred Payments?
deferred or deferred payments are where the buyer pays part of the purchase price after completion, which could be a fixed amount on a future date or in instalments over an agreed period.
If the deferred amount is fixed, you must ensure that your share purchase agreement clearly states the exact payment dates and amounts. Clear drafting in your contract can help reduce the risk of payment related disputes.
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Why Use a Deferred Payment Structure?
Many sellers will prefer to receive the full purchase price at completion. However, buyers may need more flexibility.
In these situations, the parties may decide to structure payment so that part of the price is deferred. Parties will often agree on these commercial points in principle at the heads of terms stage.
The Importance of a Clear Payment Structure
Deferred consideration exposes the seller to the risk that the buyer may not make future payments. To reduce this risk, the share purchase agreement should:
- specify the total purchase price, amount payable at completion, and any deferred amounts;
- set out the payment dates, instalment amounts and payment method;
- explain how deferred payments interact with any retention or escrow arrangements;
- include an acceleration clause allowing all outstanding amounts to become immediately payable following default or insolvency;
- include a default interest clause for overdue payments; and
- where appropriate, require security, such as a charge, debenture, or parent or personal guarantee.
This template helps you document important and major decisions or actions reached in board meetings.
Key Takeaways
Deferred consideration can help parties complete a transaction where full payment at completion is not possible. However, it changes the risk profile of the deal, particularly for the seller. Before agreeing to deferred payments, you should understand how the structure affects certainty, risk and tax, and ensure the agreement reflects those risks clearly.
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Frequently Asked Questions
What are deferred payments in a share sale?
Deferred payments mean that the buyer pays part of the purchase price after completion. The buyer may pay fixed instalments on agreed dates or link payments to future performance under an earn-out.
Why would a buyer defer part of the purchase price?
A buyer may lack sufficient funding at the time of completion. Or, they may not agree on the valuation and may require that the final price depends on completion accounts or future performance.
What happens if a buyer defaults on a deferred payment?
An acceleration clause makes all outstanding deferred amounts immediately payable upon default or insolvency. A default interest clause also applies to overdue payments, incentivising the buyer to pay on time.
Do deferred payments affect stamp duty?
Yes. In Australia, stamp duty is generally calculated on the total consideration, including deferred amounts. The timing and structure of deferred payments can affect your overall duty liability, so you should factor this into your deal structure early.
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