Buyers don’t always pay the full purchase price at closing. Business sales are sometimes structured with deferred consideration, where a portion of the purchase price is paid at a later date rather than upfront at closing. This includes payments made in instalments or contingent on an earn-out.
A buyer might choose deferred consideration for various reasons, such as financing costs or to bridge valuation gaps where a price cannot be agreed. While it serves as a risk mitigation strategy for buyers in case the target company’s performance falls short, sellers have handed over the target but are still owed money. This makes the negotiation of rights and post-closing payments important to protect the seller’s interests.
TYPES OF DEFERRED CONSIDERATION
- TYPES OF DEFERRED CONSIDERATIONS
- Non-Contingent deferred consideration: Under this structure, the amount payable is agreed in advance, but payment is postponed. For example, a buyer may pay 70% of the purchase price at closing and the remaining 30% in three instalments over the following 18 months. The principal issue for the seller is financial and arises from payment defaults.
- Earn-outs: An earn-out makes part of the purchase price contingent on the future performance of the business. The amount payable may depend on revenue, EBITDA, customer numbers or another agreed performance indicator. The seller’s risk entitlement depends on what happens to that business after the buyer assumed control.
These structures are permissible under the UAE Federal Decree-Law No. 25 of 2025 on Civil Transactions Law (“Civil Transaction Law”) provided the price is determined or determinable, and the parties have agreed to defer payment.
SELLER RISKS AND HOW TO ADDRESS THEM
The Civil Transaction Law prioritises party autonomy. The parties’ written agreement prevails over general legal defaults. If the seller does not negotiate protections into the contract, the law will not assume them.
Buyer Defaults on Payment
The buyer may simply fail to pay an instalment when it falls due. More seriously, the buyer may run into financial difficulties or become insolvent before the deferred consideration has been paid.
- Before closing, the seller should conduct financial due diligence on the buyer and obtain audited financial statements for the prior two years, review bank references, and assess the buyer’s access to capital. Model scenarios in which the earn-out calculation varies based on different operational outcomes. This helps create a baseline record of the buyer’s financial capacity and provide evidence in later disputes.
- The seller may seek additional credit support, such as a parent guarantee, escrow arrangement or security over appropriate assets.
- The agreement should also specify the consequences of a payment default. These may include a cure period, acceleration of outstanding consideration and, where appropriate, termination or other contractual remedies.
Buyer Influence on the Earn-Out
An earn-out creates a particular problem because the buyer may control the decisions that determine whether the performance target is reached. While the UAE Civil Transactions Law requires that contracts must be performed according to their contents and consistently with good faith, this is not a substitute for drafting the seller’s rights that will apply in practice.
- The SPA should set clear operating parameters for the earn-out period. Depending on the transaction, these could include ordinary-course covenants, restrictions on diverting business or revenue, controls on related-party transactions and protections against actions principally intended to frustrate the earn-out.
- The seller should have a right to inspect the target’s books and records, including accounting systems and internal management reports, on reasonable notice. The buyer should be obligated to deliver audited or reviewed financial statements on a defined schedule.
- Depending on the transaction, the seller may negotiate consent rights, consultation rights or specific restrictions over material decisions that could disproportionately affect the earn-out.
Disputes about Performance
If clear, measurable mechanisms aren’t discussed, there can be a dispute at every milestone over which measure, its calculation, accounting principles, who calculates the earn-out first and third-party valuation.
- Earn-out targets must be objective and calculable by reference to the target’s audited or reviewed financial statements prepared under specified accounting principles.
- The Civil Transaction Law allows parties to a sale to set out the valuation mechanism and agree to the valuation report prepared by a third-party valuer. A formula that two independent accountants would calculate identically reduces disputes
Buyer Indemnity and Set-Offs
A buyer may seek to deduct amounts from deferred consideration on the basis that it has a claim against the seller, for example under a warranty or indemnity. The risk for the seller is that a disputed or unsubstantiated claim becomes a reason to withhold an otherwise due payment.
- The seller should negotiate the circumstances in which set-off is permitted. For example, the agreement could distinguish between claims that are admitted or finally determined and claims that are merely asserted.
- The parties could also agree that a disputed amount is placed into escrow pending resolution, rather than allowing the buyer to withhold the entire deferred payment. An independent determination process, with specified time limits, can also prevent a payment dispute from remaining unresolved indefinitely.
- The seller should impose a cap on the amount the buyer may set off against deferred consideration, whether as a percentage of the deferred amount or a fixed sum, so that a set-off claim cannot eliminate the seller’s payment in full.
Buyer Becomes Insolvent
A seller who remains unpaid when the buyer enters insolvency proceedings may find itself competing with other creditors as an unsecured creditor, reducing payment certainty.
- This is where the distinction between an unsecured contractual claim and secured credit support matters. Under the Federal Decree-Law No. 51 of 2023 on Financial Restructuring and Bankruptcy, creditors whose claims are secured by movable or immovable property have priority over ordinary creditors to the extent of their security. The seller should consider whether an enforceable and properly perfected security interest can be created to protect their rights in case of the buyer’s insolvency.
LEGAL FRAMEWORK AND SELLER PROTECTIONS
The UAE legal framework offers sellers tools to reduce these risks, though they must be contractually invoked. The agreement governs first. Where the agreement is silent, the Federal Decree Law No 50 of 2022 on Commercial Transactions (“Commercial Transaction Law”) applies to matters within its scope, including sale by instalment, where the sale is between merchants. The Civil Transactions Law applies as the general law, addressing matters the Commercial Transaction Law does not, including price certainty and good faith in performance.
- Commercial Registry Requirements: Transfer of share ownership is recorded in the Company’s Register. Until recorded, the transfer is not effective against the company or third parties. This provides a mechanism to withhold recording of the share transfer if the buyer is not in compliance with payment obligations, though the practical utility depends on the buyer’s cooperation and may trigger disputes over ownership.
- Under the Commercial Transaction Law, the seller has the right to enforce an agreement that full consideration is due when the buyer defaults on an instalment.
- If the buyer defaults on a fixed instalment payment, the seller retains a right to petition the UAE courts to rescind the sale entirely, under the Commercial Transaction Law. This offers leverage in negotiation but carries practical constraints as rescission is a court remedy, requiring proof of fundamental breach, and a court that finds the buyer has already paid the larger part of the price may grant additional time to pay and refuse rescission. Where rescission is granted, the seller returns the instalments received, and the buyer returns the business.
CONCLUSION
Deferred consideration structures involve allocation of risk and payment schedules between the buyer and seller. For the seller, transferring the business while payment remains outstanding creates risk exposure. Exposure is manageable through deliberate contractual allocation, security arrangements, and verification of the buyer’s financial strength before closing. Failing to address these issues in the purchase agreement leaves the seller reliant on general legal principles that provide only limited recourse. The cost of sophisticated seller protections in the purchase agreement is modest compared to the risk of losing material consideration after closing. An exit is valuable only to the extent the seller receives the cash entitlement.
Authors: Shantanu Mukherjee, Maitreyi Ramdas
