Deferred Consideration and Contingent Consideration
Deferred consideration is the fee which the buyer agrees to pay over a period of time in the future. Contingent Consideration is the purchase price that the buyer agrees to pay unless some conditions are met. Both terms are very popular to use in business acquisition regarding the payment made from the buyer.
In business combination, the acquirer may request to make payment later than the acquisition date. It helps to get the deal complete without requiring huge cash paid as it will be a problem for them. In practice, the deferred consideration is only some part of the deal, only some portion of the consideration is deferred.
However, it will be a problem for the acquiree who need to cash early to invest somewhere else. In exchange, they can demand a higher price to settle with the time value of money and the risk involved.
For example, Parent Company acquired 100% share in the subsidiary company with the consideration of $ 15M on 01 January 202X. However, the parent only pays $ 10M on the date of acquisition. Another $ 5M will be paid at the end of the year, it is considered as the deferred consideration.
In business combination, Contingent Consideration is the amount which the acquirer paid to acquiree depend on some condition mostly the financial performance. Usually, it is a part of the whole deal which will be paid when a certain performance of the company is met.
The parent company acquired the subsidiary for $ 25M. $ 15M of cash will be paid in cash on the day of acquisition, and another $ 10M will be paid if the ESP of the company increase by more than 50% by the end of year 2.
The amount of $ 10M is the contingent consideration which depends on the company’s performance in the next two years.