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Exiting your business: Form of consideration

There are three main types of consideration, cash, shares and loan notes, and your consideration may well comprise a mixture of the three. There might also be an element of deferred consideration.

The advantage of cash is that you know exactly how much you will receive.

You may well be offered shares in the purchasing company, commonly if it is intended that you have a long term involvement with the business after the sale. This form of consideration ties you in with the purchaser, particularly if the shares offered are unquoted and therefore potentially difficult to sell. Even if there is a market for the shares, the contract will probably include provisions that prevent you from selling the shares for some time, and so you bear a risk that the value of the shares will fall before you can sell them.

Loan notes are instruments which are usually either redeemed for cash or converted to shares at some time in the future and, until the redemption date, interest is usually paid on the value of the loan notes. Loan notes can offer some flexibility in payment terms, for example you may be able to choose either a cash or a share alternative. The precise terms of any loan notes will have tax implications to consider.

Deferred consideration is consideration which is not payable until some time after the deal. The amount may be fixed at the time of the deal or it may be dependent on future events, and so you might not know for certain how much the total consideration will be at the time of the signing the contract.

Consideration which is based on the future performance of the business is often referred to as an earnout. Earnouts are often used when there is uncertainty over the future prospects of the company, or when the purchaser wants to motivate you to ensure the business continues to be a success.

Click here to find out more about how the type of consideration will affect your tax bill.

In a trade sale where the purchaser wants to call on your experience for a time after the completion of the sale it is common for you to be offered a consultancy contract. In certain circumstances, you might want to exit from your business in stages. If you are a partner, you might want to reduce your partnership share over time, for example in the years leading up to retirement. In the case of a family succession or a management buyout in a company, you might want to sell your shareholding in stages, reflecting both a gradual reduction in your involvement in the company and also your successors' ability to pay for the shares.

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Within Selling your business… Within Exiting your business… General...