In many business sales, the buyer doesn’t pay all the money upfront. Instead, part of the price is deferred – that is, paid later. It might be paid in one lump sum after a set period, or in instalments over time. Sometimes it’s linked to performance targets (an earn-out); sometimes it’s simply to help with the buyer’s cash flow. It’s very often the case with buyers who want to buy businesses with no money down.

But as simple as it sounds, deferring part of the price has important legal and tax consequences – and it’s crucial that both parties understand the implications.

In this article, I’ll cover:

• How deferred payments work in business sales
• Whether a separate loan agreement is required
• What security a seller should ask for
• The impact on VAT and TOGC rules
• Practical tips for structuring deferred consideration properly

How do deferred payments usually work?

In a business sale, the total purchase price can be structured in several ways. Deferred payments usually fall into one of three categories:

1. Fixed deferred consideration – a set amount, payable on a fixed date or dates (e.g. £50,000 payable 6 months after completion).
2. Instalments – regular payments over a period (e.g. £10,000 a month for 12 months).
3. Earn-outs – payments linked to the future performance of the business (e.g. 10% of profits in year 1).

These payments are usually documented within the main sale agreement. That means there is no need for a separate loan agreement – provided that the wording in the sale contract is clear, enforceable, and includes key terms such as interest, timing, and consequences of non-payment.

That said, in some cases – particularly where the deferred element is large or extends over a long period – the parties may prefer to use a separate loan agreement to keep the debt clearly ringfenced. Some buyers might want to structure it as a “loan” rather than deferred consideration because they want to try to offset the payments against income tax rather than it be a capital expenditure – I’d stay clear of that potential tax fraud if I were you.

Should you take security for deferred payments?

If you’re the seller, and the buyer isn’t paying in full on completion, you need to ask yourself a simple question: what happens if they don’t pay the rest?

Without security, you’re essentially an unsecured creditor. If the buyer’s company fails, you may never see the deferred element. If you were a Bank lending anyone more than about £20,000 you’d expect them to seek security, so you should too.

There are a few common forms of security used to protect sellers:

• Debenture – this is a legal charge over all the assets of the buyer’s company. It gives you a right to recover money ahead of unsecured creditors if the company goes into insolvency.
• Legal charge over property – if the buyer owns a commercial or residential property, the seller can take a charge (like a mortgage) over it. This is often used in M&A deals where the buyer has valuable assets outside the business.
• Personal guarantee – if the buyer is a company, you might ask for a personal guarantee from the individual behind it. This makes them personally liable if the company defaults.
• Parent Company Guarantee – if the buyer is a newly formed SPV, but its parent company is a giant, then a written promise from the parent to pay may be sufficient security.
• Charge over shares – this allows you to take back the shares from the Buyer if they default, not the best of security as by then the company could be insolvent or close to it, but it is still better than nothing.
• Retention of title / escrow – in some cases, part of the business (e.g. shares or key assets) might be held back until the deferred payment is made, although this is less common.

Each of these comes with pros and cons, and not all buyers will agree to offer security. But if you’re selling a business and trusting a buyer to pay you later, it’s entirely reasonable to want some protection.

What about interest and default provisions?

Deferred payments should always include clear terms about what happens if the buyer is late or defaults. Key points to include:

• Whether interest accrues on deferred sums (and if so, at what rate)
• Whether there’s a grace period before interest is triggered
• Whether default accelerates the remaining balance (i.e. all outstanding payments become due)
• Whether the seller has any right to retake control of the business or enforce security

These provisions need to be properly drafted, and enforcement options should be discussed with your solicitor before signing anything.

Does deferring payment affect the TOGC rules?

In most business sales, the seller doesn’t charge VAT on the sale if the transaction qualifies as a Transfer of a Going Concern (TOGC). This can be very beneficial for cash flow and tax efficiency.

But TOGC treatment depends on several conditions being met, including:

• The business must be transferred as a going concern
• The buyer must intend to continue operating it in the same kind of business
• The buyer must be VAT registered

So where does deferred consideration come in?

In theory, deferring part of the price does not automatically disqualify the sale from TOGC treatment. HMRC guidance accepts that consideration may be paid over time, and this won’t usually affect TOGC status, provided the other conditions are met.

However, problems can arise where:

• The deferred payment is uncertain or contingent (e.g. linked to future performance)
• The structure is more akin to a loan (with complex financing terms or third-party funding)
• There’s a risk that the business won’t continue as a going concern

To reduce risk, it’s best to:

• Make the deferred payments clearly documented and unconditional where possible
• Avoid excessive conditions that might imply the business isn’t being transferred fully at the time of completion
• Ensure both parties are VAT registered and intending to continue the same type of trading

Getting this wrong can result in VAT being payable on the entire sale price – which can lead to major cash flow issues and potential penalties.

So, do I need a separate loan agreement or not?

There’s no hard and fast rule. If the deferred amount is relatively small, or due within a short period, the main sale agreement can usually handle it. But if the payment is:

• Spread over a long period
• Significant in value
• Linked to performance or other conditions

Then it may make sense to document it separately. A standalone loan agreement can include:

• Loan amount and repayment schedule
• Interest and fees
• Events of default
• Enforcement provisions
• Security details (cross-referenced to the charge or debenture)

This approach also helps where the buyer’s company is using external finance – the lender may require clean documentation or a ranking agreement.

The important bit is that the loan agreement or facility agreement should link back to the business purchase agreement and referred to the deferred payments, rather than simply Lender is lending £x to Borrower, as that is not really happening.

Final tips for sellers and buyers

If you’re the seller:

• Don’t rely on goodwill. If payment is deferred, protect yourself.
• Ask for security and interest where appropriate
• Get tax advice early to check TOGC and Capital Gains Tax implications
• Be clear in the agreement – vague clauses are difficult to enforce

If you’re the buyer:

• Make sure you understand the payment terms and your obligations
• If security is being requested, consider how that affects your other borrowing
• Get the accounting treatment right – deferred consideration may need to be booked as a liability
• Make sure you’re not unintentionally triggering VAT by changing TOGC status

In summary

Deferred payments are common in business sales – especially where buyers need flexibility or sellers want to stay involved. But they’re not risk-free, and they need to be documented properly. From security and loan agreements to TOGC rules and interest clauses, there’s a lot to get right.

If you’re buying or selling a business and part of the price is being deferred, get in touch. I can help you structure the deal in a way that works for everyone – and protects your position if things go wrong. Get in touch.