How To Structure A Business Acquisition: Earn-Outs, Vendor Finance and Deferred Consideration Explained
The price is only half the conversation in any business acquisition. How the deal is structured — the timing of payments, the mechanisms attached to them, and the legal framework around the transaction — often matters as much as the headline number. Two deals at the same price can be completely different propositions depending on how they are put together.
Understanding deal structuring is what separates acquisition entrepreneurs who close deals from those who spend years circling opportunities without completing. It is also the area where the most creative value creation happens — for both buyers and sellers. This guide covers the main deal structures used in UK SME acquisitions, when each one applies, and how to think about the trade-offs involved.
The First Decision: Share Purchase or Asset Purchase?
Before you discuss payment terms or earn-out mechanics, you need to decide on the fundamental legal structure of the transaction. In the UK, most business acquisitions are structured as either a share purchase or an asset purchase.
Share Purchase
In a share purchase, you buy the shares of the company. You acquire everything — all assets, all contracts, all liabilities, all history. The company continues as a legal entity under new ownership. This is the default structure for most UK SME acquisitions because it is simpler legally, requires fewer third-party consents (most contracts do not require novation), and is often more tax-efficient for the seller under Business Asset Disposal Relief (formerly Entrepreneurs' Relief).
The buyer's risk in a share purchase is the unknown historical liabilities — the things you did not find in due diligence. This is why warranties and indemnities in the share purchase agreement are critical. They are your contractual protection against the undiscovered problems.
Asset Purchase
In an asset purchase, you buy specific assets of the business — typically the trading assets, goodwill, intellectual property, customer contracts, and equipment — rather than the company itself. You leave the corporate shell, its liabilities, and its history behind.
This structure suits buyers who want a clean break from the historical liabilities of the business, or where there are specific issues in the company's history that make acquiring the shares unattractive. It is also more common in distressed situations, where a business is acquired out of administration or pre-pack.
The downsides for the buyer: customer and supplier contracts often need to be novated (re-assigned), TUPE applies to employees and requires careful handling, and the tax treatment for the seller is generally less favourable — which affects how negotiations play out.
For more on how structure affects valuation, see our guide on how to value a business in the UK.
Payment Structures: The Main Options
Once the legal framework is decided, the next question is how payment is structured. In the UK SME market, the following mechanisms are most commonly used — often in combination.
Cash on Completion
The simplest structure: the full agreed price is paid in cash at completion. Clean for the seller, maximum certainty, no ongoing obligations. This is what sellers want and what most buyers offer on their first deal — because it is the structure they understand. It is also the most expensive structure for a buyer who is capital-constrained, because it front-loads all the financial risk.
Deferred Consideration
Deferred consideration is a portion of the purchase price that is paid after completion — typically over one to three years — on a fixed schedule, regardless of business performance. It is not contingent on hitting targets. It is simply a payment deferred in time.
This structure reduces the upfront cash requirement for the buyer and can bridge a valuation gap — particularly where the seller wants more than the buyer is willing to pay in cash today. The risk for the seller is counterparty risk: if the buyer's ability to pay deteriorates, the deferred payments may be at risk. Good legal drafting and, in some cases, security over assets can mitigate this.
Earn-Out
An earn-out makes a portion of the purchase price contingent on the business meeting defined performance targets after completion — typically revenue or EBITDA targets over one to three years. It is the structure that comes up most often when there is a valuation gap between buyer and seller, or where the buyer wants to reduce the risk of paying for performance that does not materialise.
Earn-outs are commercially logical but frequently contentious. The seller, now working under a new owner's direction, may find that decisions made post-completion affect their ability to hit the targets on which their remaining payment depends. Disputes about earn-out calculations are among the most common sources of post-completion litigation in UK M&A.
If you are using an earn-out, the following are non-negotiable in the documentation:
A precise, unambiguous definition of the earn-out metric — EBITDA must be defined in the same way it was used to value the business
Clear rules about what decisions the buyer can make during the earn-out period that could affect the metric
A dispute resolution mechanism that does not require full litigation to resolve disagreements
A cap and floor — the maximum earn-out payable and any guaranteed minimum
Earn-outs work best when seller and buyer are genuinely aligned on the growth strategy. They work poorly when the seller wants to exit and the buyer wants to change the business.
Vendor Finance
Vendor finance — also called seller finance or a vendor loan — is where the seller lends part of the purchase price to the buyer. The buyer pays the full price over time, with interest, rather than sourcing all the funding from a third party.
This structure is more common in the current UK market than it was five years ago, because access to traditional acquisition debt has tightened and sellers who want to transact are increasingly prepared to accept it. It aligns seller and buyer interests post-completion — the seller has a financial stake in the buyer's success. It also signals seller confidence in the business they are selling.
The seller takes on credit risk — if the buyer defaults, recovery depends on the security arrangements in the loan documentation. A well-drafted vendor loan note with appropriate security (a charge over the business assets, for example) gives the seller meaningful protection. An undocumented or poorly secured vendor loan is a much more exposed position.
Combining Structures: How Real Deals Are Built
In practice, most UK SME acquisitions use a combination of the above mechanisms rather than a single structure. A typical deal might look like this:
60% cash on completion — funded from a combination of the buyer's own equity and bank debt
20% deferred consideration — paid in equal instalments over 24 months
20% vendor finance — structured as a loan note over 36 months at 6% interest
This structure reduces the upfront cash requirement for the buyer, provides the seller with certainty on 80% of the consideration upfront, and keeps the seller financially engaged during the transition period. The vendor loan note creates ongoing alignment without the complexity and dispute risk of an earn-out.
The right combination depends on the specific deal — the seller's motivation and timeline, the buyer's capital position and risk appetite, the certainty of the business's future performance, and the relationship dynamic between the two parties.
The Deal Structure Decision Tree
A simple framework for deciding which structures to consider:
Is the seller motivated primarily by certainty and speed? Maximise cash on completion, minimise contingent elements.
Is there a valuation gap that neither party wants to leave the table over? Deferred consideration or vendor finance can bridge the gap without the complexity of an earn-out.
Is there genuine uncertainty about future performance — and is the seller still going to be involved in running the business? An earn-out may be appropriate, provided it is tightly documented.
Is the buyer capital-constrained? Vendor finance is often the most flexible tool available — and many UK sellers will accept it if the overall deal is commercially sound.
Is the transaction distressed or does the buyer want to leave historical liabilities behind? Consider an asset purchase structure.
No single structure is universally right. The best deal structures are the ones that allow both parties to get what they actually need — which is rarely identical to what they say they want in the first conversation.
Tax Considerations That Affect Structure
Deal structure has significant tax implications for both parties — and in the UK, the differences can be material. These are areas where you need specialist tax advice, not general guidance, but here are the key considerations to be aware of:
Business Asset Disposal Relief (BADR) — formerly Entrepreneurs' Relief — reduces the CGT rate to 18% for qualifying sellers on their first £1m of qualifying gains from April 2026. It generally applies to share sales rather than asset sales, which is a significant reason why sellers push for share purchase structures.
Earn-out tax treatment — contingent consideration is generally taxable when the right to receive it crystallises, not when the sale completes. This creates timing differences that can significantly affect the seller's net position.
Loan notes — qualifying corporate bonds (QCBs) can defer a seller's CGT liability until the notes are redeemed. Non-QCBs are generally taxed on completion. The distinction matters and requires specialist structuring advice.
Stamp duty — share purchases attract 0.5% stamp duty on the consideration paid. Asset purchases do not attract stamp duty on goodwill, but SDLT applies to any property included.
Structure the deal without taking tax advice and you may find that what looked like a sensible commercial outcome produces an unexpected tax bill for one or both parties. Get the tax input early — before heads of terms are agreed where possible.
The Most Underused Deal Structure in the UK SME Market
In my experience, vendor finance is significantly underused in UK SME acquisitions — particularly at the lower end of the market. Most first-time buyers do not ask for it because they assume sellers will not accept it. Many sellers have never been offered it in a structured, credible way.
The reality is that a seller who is genuinely motivated to transact, who believes in the business they are selling, and who trusts the buyer they are selling to — will often accept a vendor loan as part of the structure. The interest income is real. The alignment of interests is real. And a deal that completes with vendor finance is worth infinitely more to a motivated seller than a deal that falls through because the buyer could not fully fund the purchase price from external sources.
The key is presenting it credibly — as a structured, documented, secured instrument — rather than as a desperate request for a favour. The framing matters as much as the mechanism.
Start Structuring Smarter
Understanding deal structures is one of the highest-leverage skills an acquisition entrepreneur can develop. The buyers who structure well close more deals, pay less upfront, take on less risk, and create more value — not because they are better at finding businesses, but because they have more tools available when the negotiation gets complex.
Download the Dealwise Deal Structure Guide — covering all the main structures, when to use them, and the key terms to watch for in each.
Download the Deal Structure Cheat Sheet at www.DealwiseAdvisory.co.uk
Contact Steve at [email protected] to discuss structuring your next acquisition
WhatsApp Steve on +44 7930-857243
