Deal terms

Consideration is what the buyer gives for the business. It can be cash at completion, fixed deferred payments, an earn-out based on future performance, loan notes, or shares in the buyer. Most deals use a mix. Each form is taxed differently for the seller, and some can defer tax, so the mix can change what you keep as much as the headline price.

Deferred consideration is a fixed amount paid at a later date, and is usually taxed as part of your gain at completion. An earn-out is an amount that depends on future performance, so it is unknown at completion. A cash earn-out of unknown amount is usually valued and taxed at completion, with further tax as payments arrive. Earn-outs tied to employment can be taxed as income.

The share purchase agreement is the main legal contract for selling a company's shares. It sets out the price and how it is paid, the warranties the sellers give about the business, and the tax covenant or indemnity covering pre-completion tax. The tax terms decide who pays if a tax problem arises later, so they need careful review alongside the commercial terms.

The tax schedule is the part of the sale agreement that deals with tax. It usually contains the tax warranties, the tax covenant or indemnity, limits on the sellers' liability, and rules on who handles tax returns and HMRC enquiries for periods before completion. It is often long and technical, but it decides how tax risk is shared between buyer and sellers for years after the deal.

A vendor loan note is a promise by the buyer to pay part of the price later, with interest, rather than in cash at completion. It is common in MBOs and private equity deals. How it is taxed depends on how the note is structured. Some loan notes defer the gain until they are repaid, while others are taxed at completion, which affects reliefs such as Business Asset Disposal Relief.

Heads of terms set out the main deal points, such as price, structure, how payment is made and any conditions, before the legal documents are drafted. They are usually not legally binding, but they are hard to change once agreed. Getting tax advice before you sign means the structure, form of consideration and timing can be set up in the most tax-efficient way.

They are two ways of fixing the final price. A locked box sets the price using accounts at an earlier date, with protections against value leaking out before completion. Completion accounts adjust the price after completion based on the actual position at that date. Either way, the final price is what counts for your gain, and the tax liabilities in the accounts can affect the adjustment.

A retention or escrow is part of the price held back after completion to cover possible warranty or indemnity claims. It is usually treated as part of the sale price at completion, so you may pay tax on it before it is released. If some of it is never paid, an adjustment may be available. How the arrangement is documented can affect the timing of tax.

The lawyers draft and negotiate the sale agreement, but a tax adviser should review the tax warranties, covenant and any tax-driven price mechanics. The tax adviser can explain what each clause means in practice, which risks are real, and where limits or exclusions are reasonable. This applies to both sides, and is especially important for sellers giving warranties that can last for years.

Compare what you will keep after tax, and when, rather than the headline price. An offer with more cash upfront may leave you better off than a higher offer with a large earn-out, deferred payments or tax-inefficient terms. Consider the timing of tax, the risk of not being paid, whether you qualify for reliefs, and how long you will be exposed to warranty claims.