How to structure deferred payments and cross-guarantees in small-market M&A transactions

Deferred payment as a post-closing legal relationship

Treating deferred consideration as a mere payment schedule often leads to structural mistakes. Once part of the price remains outstanding, the transaction creates an ongoing obligation that affects the balance between the parties and their conduct after closing.

In the small market, deferred consideration rarely operates in isolation. It usually coexists with shareholders’ agreements, retention commitments, non-compete clauses or transitional services agreements. All these elements influence, directly or indirectly, the buyer’s ability to generate funds and, therefore, the seller’s realistic expectation of receiving payment. Overlooking this interdependence is one of the main sources of subsequent friction.

Nature of deferred consideration and coordination with the contractual structure

From a technical perspective, deferred consideration operates as financing provided by the seller to the buyer. This characterisation is not merely conceptual: it affects how security arrangements, priority of claims and their interaction with other post-closing contractual relationships should be structured.

It is therefore not enough to provide for acceleration events or default interest. The seller’s receivable must be integrated into the contractual package governing the transaction after closing. In particular, consideration must be given to how it interacts with potential claims for breach of the SPA, penalties arising from retention or non-compete commitments, or obligations assumed under the shareholders’ agreement.

Security arrangements in smaller transactions

In this context, the question is not whether security should exist, but which forms of security are genuinely viable. Traditional arrangements such as bank guarantees, cash deposits or substantial escrow structures are often economically disproportionate in smaller transactions. Their financing cost may erode the economic balance of the deal or make closing unviable.

Consequently, in most cases, security must be structured using elements within the transaction itself, recognising that enforcement may have effects extending beyond the purely financial.

Cross-guarantees and the balance between buyer and seller

Cross-guarantees arise where the buyer’s deferred payment obligation and the seller’s warranties covering pre-closing risks rely, in whole or in part, on the same assets or individuals. Common examples in the small market include pledges over shares, security interests over key assets or personal undertakings given by significant shareholders.

Such structures require particularly careful analysis. Enforcement of security in favour of the seller may affect the buyer’s corporate control; similarly, a significant claim under the SPA may impair the buyer’s ability to pay the outstanding price. These are not exceptional situations but reasonably foreseeable scenarios in this market segment.

Contractual drafting should anticipate these interactions and regulate their consequences, avoiding solutions that, although formally sound, would be impracticable when disagreements arise.

Alternative structures

Where institutional forms of security are unavailable, the small market requires solutions more closely connected to the business and the parties. In practice, these may include purchase-price retentions, agreed set-off mechanisms, subordination of intragroup debt, restrictions on dividend distributions or limitations on certain strategic decisions while part of the purchase price remains outstanding.

These solutions do not replace traditional forms of security, but they may perform an equivalent function if coherently integrated into the contractual framework. The objective is not to accumulate mechanisms, but to understand the risk being addressed, its impact and the circumstances in which enforcement would be reasonable.

Checklist for reviewing deferred consideration before closing

As a practical review of the deal documents, it is worth considering the following:

• Are the outstanding amount, payment dates and consequences of default clearly defined?
• Has the proportionality and practical enforceability of each security arrangement been assessed?
• Has the interaction between outstanding consideration and potential SPA claims been regulated?
• Are security arrangements coordinated with the shareholders’ agreement and other post-closing contracts?
• Have the implications of enforcing security for corporate control been considered?
• Are any agreed set-off, retention or restriction mechanisms clearly documented?

For the wider transaction process, see Seegman’s small-market M&A guide.

Final considerations

In small-market M&A transactions, deferred payments and the associated security arrangements are not a financial appendix to the SPA; they are a structural element of the transaction’s legal balance. Properly structuring them requires moving away from imported models and starting with a realistic understanding of the limitations of the market and the parties.

Experience shows that the most effective solutions are not the most sophisticated, but those that clearly regulate post-closing credit and contractual relationships, anticipate potential disputes and provide reasonably enforceable remedies. In this context, structuring deferred consideration correctly is not an isolated drafting exercise but a matter of contractual architecture in the fullest sense.