Deferred consideration
M&A / Merger ModelThe part of a purchase price the buyer does not pay at completion, whether contingent on performance, on an event, or only on time.
A headline price is a sum of instruments rather than a number, and deferred consideration is the family name for everything in it that does not move on the day. Three forms cover almost all of it: an earnout, contingent on the business hitting targets; a contingent value right, contingent on a defined event; and a vendor loan note, contingent on nothing except the buyer still being able to pay.
The distinction that matters is what the payment waits on. An earnout and a contingent value right are forecasting problems, so they are valued by weighting outcomes and discounting. A vendor loan note is a credit problem, so it is valued the way a lender values subordinated paper. Candidates who use one method for all three get the note badly wrong.
A seller accepts deferred consideration because it is often the only route to the headline number, because it can defer tax, because competition in the process was thin, or because it genuinely believes the business will outperform what the buyer's lenders have underwritten. What it gives up is control: it no longer runs the business and cannot police the metric or the covenant its payment depends on.
Two consequences follow for analysis. In a precedent transactions set, the defensible multiple uses the fair value of the consideration rather than the headline maximum. And in a bid comparison, a higher headline with paper in it is not a higher bid until the paper has been valued and the discount rate has been named.
Worked example
A bid of 320 with 40 left as a vendor loan note against a rival at 300 all cash pays 280 on the day rather than 300.
Illustratively, 40 rolling up at 8% for five years matures at about 59, and discounted at 15% it is worth about 29, so the structured bid is worth roughly 309.
At a required return of about 24% the two bids are level, which is why the comparison depends on stating the rate rather than asserting a winner.