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Although, as a buyer, you will have come to an agreement with the seller regarding the purchase price for the shares in the target company, this will most likely have been based on certain assumptions. There is a risk that these assumptions prove to be incorrect and so you may seek to manage that risk by way of an earn-out arrangement or a retention.

A retention can give a buyer some reassurance that should a warranty or indemnity given by the seller prove to be untrue, the cash is there to pay for the warranty claim without having to pursue the seller for it (who may no longer have the proceeds of the share sale or have left the jurisdiction) or use it as a negotiating tool to reduce the amount of deferred consideration ultimately paid.

Another reason a buyer may prefer not to pay the full purchase price upfront is to help with cash-flow. This can be achieved by way of a deferred cash payment or loan notes. However, a seller is almost always likely to prefer payment in cash upon completion and, if that is not forthcoming, they may well seek some form of security for any deferred consideration.

See also our Consideration Glossary.


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