Acquirers and promoters rarely agree on value at the first attempt. The promoter prices in the growth plan; the acquirer prices in the risk that it will not be delivered. Deferred consideration is the most common way to close that gap.
The main structures
- Earn-out. Part of the price is paid later, only if the business meets agreed targets such as revenue or EBITDA.
- Escrow. Part of the price is held by an independent escrow agent and released after a set period, unless warranty or indemnity claims arise.
- Holdback. The acquirer retains part of the price itself for the same purpose.
- Staged acquisition. The acquirer takes a controlling stake now and acquires the balance later at a pre-agreed formula.
Cross-border limits
Where a share transfer is between a resident and a non-resident, the FEMA (Non-Debt Instruments) Rules, 2019 allow up to 25% of the total consideration to be paid on a deferred basis, through escrow or as an indemnity, within 18 months of the transfer agreement. Pricing guidelines must still be met.
Points of negotiation
- How earn-out targets are defined and measured, and which accounting policies apply.
- Who controls the business during the earn-out period, and what protections the promoter has.
- Tax timing for the promoter on consideration that may never be received.
- Release mechanics and dispute resolution for escrow amounts.
Our view
A higher headline price with a large earn-out is not always the better offer. The certainty and timing of payment should be weighed alongside the number.