Check deferred sale proceeds before promising debt repayments
Assess deferred consideration and earn-out uncertainty in the cash available from a partial business sale.
Corporate Recovery Partners
01 / 06
The headline sale price may arrive in stages
A buyer offers a substantial price for part of the business, but only some is payable at completion. The rest depends on later dates or performance conditions. Before promising creditors a payout, have the agreement and cash consequences assessed. A headline price is not the same as money available when the debts need to be met.
Imagine a company selling a service division for an upfront amount and a later payment linked to customer retention. Identify the completion amount, deferred payments and conditions separately. Ask the lawyer to explain how the figures are calculated and what could change them. Do not treat an optimistic estimate of conditional proceeds as an unconditional debt owed immediately by the buyer.
business.gov.au recommends identifying and explaining estimated figures in cash-flow forecasts. Show the sale components on their expected dates, with uncertainty visible. Include relevant costs and obligations with accounting advice. In the service-division example, money dependent on customers staying for another year should not silently fund a supplier payment scheduled immediately after completion.
Ask the advisers what information is available about the buyer's ability to meet deferred commitments and what protection the proposed documents provide. Do not assume a signed contract eliminates collection risk. Any proposed guarantee or security needs specific review rather than a label in a term sheet. Keep the cost and practicality of the arrangement part of the commercial assessment.
Conditional proceeds may depend on handover, ongoing services or other obligations. Have those terms explained and assess the resources required to perform them. Avoid promising the same staff capacity to the retained business and the buyer without a workable plan. A later payment may be less useful if earning it requires substantial costs the forecast has omitted.
Give the advisers the proposed sale terms and creditor commitments together. Explain which payments depend on completion and which depend on later outcomes. Do not present the transaction as settled before its conditions are met. A realistic debt-reduction plan recognises when sale money becomes available and what remains uncertain, rather than spending the full advertised price in advance.
