Quick answer
An earn-out is part of a purchase price paid later if the acquired business hits agreed targets; deferred consideration is a fixed amount paid later regardless. Both reduce the upfront funding a buyer needs but create future cash obligations. Buyers typically fund them from post-acquisition cash flow, a pre-approved facility, or a property-backed loan arranged ahead of the due date.
Key points
- Earn-outs depend on performance; deferred consideration is owed regardless.
- Budget for the maximum payable, not the expected amount.
- Arrange funding months before the payment date — not after the targets are measured.
- Lenders often require vendor payments to rank behind their debt.
- Earn-out
- Conditional on targets
- Deferred consideration
- Fixed, payable later
- Property-backed
- $20k – $5m
- Plan ahead
- 6–12 months
Why do earn-outs create a funding problem later?
At completion, an earn-out feels like good news for the buyer: less cash needed today, and future payments only if the business performs. The funding problem arrives 12, 24 or 36 months later, when the measurement period ends and a significant sum becomes payable — often at the same time the business is investing in integration, systems and growth.
Deferred consideration has the same timing problem without the uncertainty. The payment is fixed and falls due on a date agreed years earlier, regardless of what’s happened in between.
Both are real liabilities. Treating them as someone else’s problem until the invoice arrives is how acquirers end up negotiating extensions with sellers from a position of weakness.
How big could the payment be?
Start with the sale agreement. It will define:
- the measure — revenue, gross profit, EBITDA or a customer-retention metric
- the period — often one to three years, sometimes in annual instalments
- the formula — thresholds, caps and sliding scales
- the timing — when the calculation is done and when payment is due
- disputes — how disagreements about the numbers are resolved
Budget for the maximum potential payment, not the most likely one. If the business outperforms, you’ll owe more, and a lender will assess you on the worst case for cash flow.
| Illustrative earn-out schedule | Year 1 | Year 2 |
|---|---|---|
| Target EBITDA | $1.4m | $1.6m |
| Payment if target met | $400k | $500k |
| Maximum if exceeded (capped) | $550k | $650k |
| Payment due | 90 days after year-end accounts | 90 days after year-end accounts |
Illustrative only; no real business.
What are the funding options?
Cash flow from the combined business. The simplest path if the acquisition is performing and working capital is comfortable. Forecast it monthly and ring-fence cash as the payment approaches.
A facility approved at completion. Some acquisition funding includes a tranche reserved for later vendor payments. It gives certainty but may carry commitment costs.
A property-backed facility arranged before the due date. Property-secured lending from $20,000 to $5,000,000 can fund a lump-sum payment without disturbing operating limits. See property-backed business loans.
A negotiated payment plan with the seller. Possible, but you’re asking a favour. It’s better to have funding ready and negotiate from choice.
If an earn-out or deferred payment is on your horizon, start the funding conversation early — six to twelve months ahead gives room to choose.
What does a lender want to see?
- The sale agreement and earn-out mechanism
- Post-acquisition trading, ideally showing the integration is working
- A forecast showing cash flow after the payment and after all debt service
- Security available
- Confirmation that any remaining vendor obligations rank behind the new lender
Lenders are generally more comfortable funding an earn-out that’s being paid because the business has outperformed — the payment is evidence of success. They’re more cautious if the payment coincides with weakening trading.
Planning points for buyers
- Diarise the measurement dates alongside your BAS and year-end calendar.
- Model the earn-out in your monthly forecast from day one, at the capped maximum.
- Keep integration spending separate from working capital so the facility isn’t already consumed when the payment falls due.
- Watch your covenants. A large payment can affect gearing or cover ratios under existing facilities. See covenant pressure.
- Agree measurement rules precisely at the time of sale to avoid disputes that delay payment and funding.
Planning points for sellers
If you’re the seller, an earn-out puts part of your price at risk to someone else’s management. Consider:
- what security or guarantees support the future payments
- whether your payments rank behind the buyer’s lender (they usually will)
- whether you’re entitled to information during the earn-out period
- how to protect yourself if the buyer restructures the business
Our guide to making a business sale-ready looks at deal terms from the seller’s side, and the acquisition page covers how buyers structure the whole deal.
How do earn-outs interact with your existing bank facilities?
An earn-out is a future liability, and your lenders will treat it that way even before it’s payable. Three interactions deserve attention:
Covenant definitions. Some facility agreements count deferred consideration as debt for gearing or leverage tests; others don’t. If it’s included, the acquisition may push you closer to a covenant limit than you expected. Check the definitions and, if necessary, agree a carve-out with the bank at the time of the acquisition.
Restrictions on payments. Facility agreements sometimes restrict payments to shareholders or related parties, and a vendor who has become a shareholder or director may fall within those restrictions. Clarify in advance that scheduled earn-out payments are permitted.
Subordination. The bank will usually want the vendor’s entitlement to rank behind its debt, often with a deed that stops the vendor enforcing if the bank’s facilities are in default. That protects the bank but may leave the vendor waiting; understanding it early avoids disputes later.
Getting these points documented at completion is much easier than negotiating them 18 months later, when the payment is due and the bank is reviewing the combined business for the first time.
Have a payment coming up?
If an earn-out or deferred payment is due in the next year, bring us the amount, the due date, recent trading and the security available. We’ll outline options that keep your operating facilities clear.
We don’t run a credit check when you enquire, and your figures stay with one specialist rather than being circulated to a list of lenders. Please enter the maximum payable and the due date accurately — they determine the structure and the timeline. Discuss funding the payment.
Frequently asked questions
What's the difference between an earn-out and deferred consideration?
Deferred consideration is a fixed amount paid at a later date. An earn-out is contingent: it's paid only if the acquired business meets agreed performance measures, such as revenue or earnings targets, over a defined period.
Why would a buyer agree to an earn-out?
It bridges a gap between what the seller believes the business is worth and what the buyer can justify. The buyer pays more only if the business delivers, and needs less funding at completion.
Can a lender fund the earn-out at the time of acquisition?
Sometimes a facility is approved at completion with a tranche reserved for later payments. More commonly, the buyer arranges funding closer to the payment date, when the business's post-acquisition performance is known.
What happens if we can't pay an earn-out when it falls due?
It becomes a contractual debt to the seller, and the sale agreement will set out their remedies. Avoid this by planning funding well ahead and understanding the maximum amount that could become payable.
How do lenders treat earn-out obligations when assessing us?
As a future liability. A lender will factor the maximum potential payment into serviceability and usually require vendor payments to be subordinated to its debt.