Quick definition of Deferred Consideration
Deferred consideration is a financial arrangement where a portion of the purchase price for an asset or business is postponed and paid at a later date. It can be contingent on certain conditions, such as the future performance of the acquired company or the achievement of specific milestones. This arrangement allows both the buyer and the seller to navigate potential risks and uncertainties while still facilitating the transaction.
Let’s into the Deferred Consideration origin
The term “deferred consideration” appears frequently in the realm of mergers and acquisitions, where negotiations can be complex and nuanced. As business transactions evolved over time, there arose a need for flexible financing options that allowed both parties to reach an agreement without exposing themselves to undue risk. Deferred consideration serves as a tool to bridge the gap between the seller’s desire for a fair price and the buyer’s need for assurance regarding the future performance of what they are acquiring. Its widespread use reflects our collective effort to create more favorable deal structures while ensuring that all parties remain invested in the success of the acquired business.
The Deferred Consideration (full & serious definition)
Deferred Consideration
Deferred consideration is a term used in the context of business acquisitions to describe a portion of the purchase price that is payable by the buyer in the future, rather than at the time of closing. This structure allows for the payment of consideration to be delayed to a later specified date or until the occurrence of specific triggers, milestones, or targets.
#What is Deferred Consideration?
In essence, deferred consideration is a component of the purchase price that is not paid upfront but is instead delayed to a later date. This can be due to various reasons such as ensuring the vendor has “skin in the game,” managing funding pressures, or as part of an incentivization tool for rollover management [2]. The deferred consideration may take several forms, including cash, loan notes, shares, earn-outs, purchase price adjustments following finalization of completion accounts, and retentions [4].
#Types of Deferred Consideration
There are primarily three types of deferred consideration:
1. Contingent Deferred Consideration: This type is only payable if specified triggers, milestones, or targets occur. The amount is not known at the time of the acquisition and becomes quantifiable and measurable once these conditions are met [2].
2. Non-Contingent Deferred Consideration: This type is payable irrespective of conditionality and is known on completion of the acquisition or is otherwise determinable and measurable [2].
3. Crystallized Deferred Consideration: This refers to contingent deferred consideration that has become quantifiable and measurable due to the trigger, milestone, or target having been satisfied [2].
#Why is Deferred Consideration Popular?
For buyers, deferred consideration offers several benefits:
– It avoids the need for immediate cash outlay, thereby preserving cash reserves and reducing the need for borrowing.
– It allows the buyer to part-fund the acquisition from future profits of the business, provided it is profitable [1].
– It provides an incentive structure where future payments are tied to specific performance metrics, aligning the interests of both parties.
For sellers, while there are benefits in terms of potentially higher purchase prices due to deferred payment structures, there are also risks involved:
– The seller must wait for their money and faces the risk that the buyer may not be able to pay the deferred portion of the consideration when it becomes due [1].
– Sellers may require security to ensure payment, such as a charge over assets or shares of the target company [1].
#Implementation and Controls
The deferral mechanism is typically drafted in the transaction documents implementing the sale of the company or business. Sellers often seek security to mitigate risks associated with deferred payments. This can include bank guarantees or collateral where no assignment can take place without consent [3]. Lenders may impose restrictions on deferred consideration to control its impact on financial measurements and to ensure that payments are made in accordance with agreed terms [2].
#Tax Considerations
Deferred consideration structures can be complex from a tax perspective. It is crucial for both buyers and sellers to obtain suitable tax advice to ensure that the tax treatment is acceptable and compliant with relevant laws [1].
Why is it Important to Understand this Term in M&A?
Understanding deferred consideration is crucial in mergers and acquisitions (M&A) for several reasons:
1. Risk Management: It helps in managing risks associated with cash flow and liquidity, particularly in periods of poor liquidity [3].
2. Incentivization: It provides an effective tool for incentivizing rollover management and aligning the interests of both parties through performance-based payments [2].
3. Flexibility: It offers flexibility in structuring deals, allowing for more creative and tailored agreements that meet the specific needs of all parties involved [1].
4. Financial Planning: It aids in financial planning by allowing buyers to manage their acquisition costs more effectively and sellers to secure higher purchase prices while mitigating risks [1].
In summary, deferred consideration is a sophisticated financial tool that plays a significant role in M&A transactions by offering flexibility, incentivization, and risk management. Its proper implementation requires careful consideration of legal, tax, and financial implications to ensure successful deal-making.
References:
[1] HCR Law. (2023-03-10). Deferred consideration – the whats, whys and hows.
[2] Osborne Clarke. (2022-09-21). To defer or not to defer, that is a consideration.
[3] Divestopedia. (2024-03-22). Definition of Deferred Consideration.
[4] Practical Law. (n.d.). Deferred consideration.
[5] GoCardless. (n.d.). Contingent consideration in accounting. 
In essence, deferred consideration is a component of the purchase price that is not paid upfront but is instead delayed to a later date. This can be due to various reasons such as ensuring the vendor has “skin in the game,” managing funding pressures, or as part of an incentivization tool for rollover management [2]. The deferred consideration may take several forms, including cash, loan notes, shares, earn-outs, purchase price adjustments following finalization of completion accounts, and retentions [4].
#
Types of Deferred Consideration
There are primarily three types of deferred consideration:
1. Contingent Deferred Consideration: This type is only payable if specified triggers, milestones, or targets occur. The amount is not known at the time of the acquisition and becomes quantifiable and measurable once these conditions are met [2].
2. Non-Contingent Deferred Consideration: This type is payable irrespective of conditionality and is known on completion of the acquisition or is otherwise determinable and measurable [2].
3. Crystallized Deferred Consideration: This refers to contingent deferred consideration that has become quantifiable and measurable due to the trigger, milestone, or target having been satisfied [2].
#Why is Deferred Consideration Popular?
For buyers, deferred consideration offers several benefits:
– It avoids the need for immediate cash outlay, thereby preserving cash reserves and reducing the need for borrowing.
– It allows the buyer to part-fund the acquisition from future profits of the business, provided it is profitable [1].
– It provides an incentive structure where future payments are tied to specific performance metrics, aligning the interests of both parties.
For sellers, while there are benefits in terms of potentially higher purchase prices due to deferred payment structures, there are also risks involved:
– The seller must wait for their money and faces the risk that the buyer may not be able to pay the deferred portion of the consideration when it becomes due [1].
– Sellers may require security to ensure payment, such as a charge over assets or shares of the target company [1].
#Implementation and Controls
The deferral mechanism is typically drafted in the transaction documents implementing the sale of the company or business. Sellers often seek security to mitigate risks associated with deferred payments. This can include bank guarantees or collateral where no assignment can take place without consent [3]. Lenders may impose restrictions on deferred consideration to control its impact on financial measurements and to ensure that payments are made in accordance with agreed terms [2].
#Tax Considerations
Deferred consideration structures can be complex from a tax perspective. It is crucial for both buyers and sellers to obtain suitable tax advice to ensure that the tax treatment is acceptable and compliant with relevant laws [1].
Why is it Important to Understand this Term in M&A?
Understanding deferred consideration is crucial in mergers and acquisitions (M&A) for several reasons:
1. Risk Management: It helps in managing risks associated with cash flow and liquidity, particularly in periods of poor liquidity [3].
2. Incentivization: It provides an effective tool for incentivizing rollover management and aligning the interests of both parties through performance-based payments [2].
3. Flexibility: It offers flexibility in structuring deals, allowing for more creative and tailored agreements that meet the specific needs of all parties involved [1].
4. Financial Planning: It aids in financial planning by allowing buyers to manage their acquisition costs more effectively and sellers to secure higher purchase prices while mitigating risks [1].
In summary, deferred consideration is a sophisticated financial tool that plays a significant role in M&A transactions by offering flexibility, incentivization, and risk management. Its proper implementation requires careful consideration of legal, tax, and financial implications to ensure successful deal-making.
References:
[1] HCR Law. (2023-03-10). Deferred consideration – the whats, whys and hows.
[2] Osborne Clarke. (2022-09-21). To defer or not to defer, that is a consideration.
[3] Divestopedia. (2024-03-22). Definition of Deferred Consideration.
[4] Practical Law. (n.d.). Deferred consideration.
[5] GoCardless. (n.d.). Contingent consideration in accounting.
For buyers, deferred consideration offers several benefits:
– It avoids the need for immediate cash outlay, thereby preserving cash reserves and reducing the need for borrowing.
– It allows the buyer to part-fund the acquisition from future profits of the business, provided it is profitable [1].
– It provides an incentive structure where future payments are tied to specific performance metrics, aligning the interests of both parties.
For sellers, while there are benefits in terms of potentially higher purchase prices due to deferred payment structures, there are also risks involved:
– The seller must wait for their money and faces the risk that the buyer may not be able to pay the deferred portion of the consideration when it becomes due [1].
– Sellers may require security to ensure payment, such as a charge over assets or shares of the target company [1].
#
Implementation and Controls
The deferral mechanism is typically drafted in the transaction documents implementing the sale of the company or business. Sellers often seek security to mitigate risks associated with deferred payments. This can include bank guarantees or collateral where no assignment can take place without consent [3]. Lenders may impose restrictions on deferred consideration to control its impact on financial measurements and to ensure that payments are made in accordance with agreed terms [2].
#Tax Considerations
Deferred consideration structures can be complex from a tax perspective. It is crucial for both buyers and sellers to obtain suitable tax advice to ensure that the tax treatment is acceptable and compliant with relevant laws [1].
Why is it Important to Understand this Term in M&A?
Understanding deferred consideration is crucial in mergers and acquisitions (M&A) for several reasons:
1. Risk Management: It helps in managing risks associated with cash flow and liquidity, particularly in periods of poor liquidity [3].
2. Incentivization: It provides an effective tool for incentivizing rollover management and aligning the interests of both parties through performance-based payments [2].
3. Flexibility: It offers flexibility in structuring deals, allowing for more creative and tailored agreements that meet the specific needs of all parties involved [1].
4. Financial Planning: It aids in financial planning by allowing buyers to manage their acquisition costs more effectively and sellers to secure higher purchase prices while mitigating risks [1].
In summary, deferred consideration is a sophisticated financial tool that plays a significant role in M&A transactions by offering flexibility, incentivization, and risk management. Its proper implementation requires careful consideration of legal, tax, and financial implications to ensure successful deal-making.
References:
[1] HCR Law. (2023-03-10). Deferred consideration – the whats, whys and hows.
[2] Osborne Clarke. (2022-09-21). To defer or not to defer, that is a consideration.
[3] Divestopedia. (2024-03-22). Definition of Deferred Consideration.
[4] Practical Law. (n.d.). Deferred consideration.
[5] GoCardless. (n.d.). Contingent consideration in accounting.
Deferred consideration structures can be complex from a tax perspective. It is crucial for both buyers and sellers to obtain suitable tax advice to ensure that the tax treatment is acceptable and compliant with relevant laws [1].
Why is it Important to Understand this Term in M&A?
Understanding deferred consideration is crucial in mergers and acquisitions (M&A) for several reasons:
1. Risk Management: It helps in managing risks associated with cash flow and liquidity, particularly in periods of poor liquidity [3].
2. Incentivization: It provides an effective tool for incentivizing rollover management and aligning the interests of both parties through performance-based payments [2].
3. Flexibility: It offers flexibility in structuring deals, allowing for more creative and tailored agreements that meet the specific needs of all parties involved [1].
4. Financial Planning: It aids in financial planning by allowing buyers to manage their acquisition costs more effectively and sellers to secure higher purchase prices while mitigating risks [1].
In summary, deferred consideration is a sophisticated financial tool that plays a significant role in M&A transactions by offering flexibility, incentivization, and risk management. Its proper implementation requires careful consideration of legal, tax, and financial implications to ensure successful deal-making.
References:
[1] HCR Law. (2023-03-10). Deferred consideration – the whats, whys and hows.
[2] Osborne Clarke. (2022-09-21). To defer or not to defer, that is a consideration.
[3] Divestopedia. (2024-03-22). Definition of Deferred Consideration.
[4] Practical Law. (n.d.). Deferred consideration.
[5] GoCardless. (n.d.). Contingent consideration in accounting.
Case study about Deferred consideration in Uber’s Acquisition of Postmates
In July 2020, the landscape of food delivery in the United States underwent a significant transformation as Uber Technologies, Inc. made headlines with its strategic acquisition of Postmates, a popular delivery service. Valued at approximately $2.65 billion, this deal reflected Uber’s ambition to strengthen its foothold in the competitive food delivery market, primarily dominated by rivals like DoorDash.
The acquisition was structured to include both immediate and deferred considerations, making it a noteworthy example of how companies can mitigate risk while pursuing long-term growth. Uber paid an upfront consideration of about $1.8 billion in stock and reserved the remaining $850 million as deferred consideration, scheduled for payment in installments contingent upon Postmates’ performance. This performance-based element incentivized the Postmates team to achieve specific revenue targets, aligning their goals with those of Uber and encouraging a focused effort on sustaining growth after the acquisition.
The deal was first announced on July 6, 2020, and concluded in January 2021 after securing the necessary regulatory approvals. The rationale behind the acquisition was multifaceted. Uber aimed not only to enhance its market share in urban centers during a time of increased demand for delivery services but also to diversify its revenue streams, especially as ride-sharing revenues dwindled due to the pandemic.
The integration of Postmates into Uber Eats yielded substantial outcomes. Following the merger, Uber Eats saw remarkable growth in market share. This acquisition allowed Uber to leverage its logistics infrastructure, enhancing operational efficiencies in a rapidly evolving market. The financial community reacted positively to the announcement, with Uber’s shares closing up by 6% at $32.52 on the day of the news, indicating investor support for the strategic direction of the company.
Throughout the process, Postmates retained its brand identity, which played a crucial role in maintaining employee morale and customer loyalty during the transition. Despite undergoing scrutiny from regulatory bodies, the merger ultimately contributed to consolidating the food delivery industry into three major players: Uber Eats, DoorDash, and Grubhub.
Additional insights emerged from Uber’s integration strategy, as the company organized a national “listening tour” to understand the perspectives of partner merchants and improve its service offerings. The combined entity of Uber Eats and Postmates would command approximately 30% of the U.S. restaurant delivery market, highlighting the significance of this acquisition.
In conclusion, the acquisition of Postmates by Uber is a compelling case study in the application of deferred consideration within mergers and acquisitions. By tying part of the payment to future performance, Uber strategically managed its financial risk while fostering a collaborative environment focused on shared goals. The Postmates deal exemplifies how deferred consideration can serve as a powerful tool in aligning interests post-acquisition, ultimately driving growth and operational success in a competitive landscape.
Learn the term in other languages
| Language | Term |
|---|---|
| English | Deferred Consideration |
| French | Rémunération différée |
| Spanish | Consideración diferida |
| German | Aufgeschobene Gegenleistung |
| Italian | Considerazione differita |
