Earn-Outs in Electrical Deals: Structure, Risk and the Small Print

The ReasonWhat the buyer is actually insuring against

An earn-out is neither a negotiating trick nor a comment on your honesty. It is the buyer pricing the specific risks they cannot check from outside: that the clients stay after you leave, that the framework position is renewed, that the testing book recurs as the schedule says it will, and that the work in progress and retentions convert to cash at the figure in the accounts.

Read that way, the structure tells you what the buyer is unsure about, which is useful information regardless of whether you accept it. A large deferred element tied to client retention says they think the relationships are yours rather than the business's. A modest one tied to a single framework renewal says they are comfortable with everything except one contract. The shape of the offer is a diagnosis.

It follows that the way to reduce the deferred proportion is not to argue about it at heads of terms. It is to remove the uncertainty in the eighteen months before, by moving relationships onto the business, getting recurring arrangements into writing with renewal dates, and producing a retentions schedule that has been right for three years running. Sellers who do that are offered more cash at completion because there is less left to insure.

The DraftingThe clauses that decide whether you see the second payment

Measure the earn-out on something you can still influence. Revenue or gross profit from your own client base is defensible. Group EBITDA after the buyer has allocated central overheads, changed the accounting policies and moved two of your engineers onto somebody else's contract is not, and an earn-out measured that way is a lottery ticket with your name on it.

Define the measure in the agreement rather than by reference to what everybody understands it to mean. Adjusted EBITDA needs its adjustments listed. Management charges, the treatment of capital expenditure, how intercompany work is priced and what happens to the cost of a new finance system all need writing down. Most earn-out disputes are arguments about definitions that seemed obvious to both sides when nobody was counting.

Then protect the conduct of the business during the period. A covenant that the buyer will not act with the intention of reducing the earn-out is standard and weak on its own, so specify the concrete things: that your part of the business is run as a separate profit centre with its own accounts, that you have access to the records and a right to see the calculation, that material changes need your consent, and that an independent accountant settles any dispute.

Finally, think about what happens if the relationship ends early. If you are dismissed or resign during the earn-out period, the agreement should say what you receive, and good leaver and bad leaver definitions are worth more attention than their placement in the document suggests. An earn-out that evaporates on a disagreement in month four is not consideration; it is an incentive scheme wearing a sale agreement.

The shape of the offer is a diagnosis. A large deferred element tied to retention says the buyer thinks the relationships are yours, not the business's.

Tax and TermHow it is taxed, and how long to accept

Deferred consideration of a fixed amount is generally treated as part of the disposal proceeds at completion, taxed then even though the cash arrives later. Where the future amount is genuinely unascertainable, the right to receive it is itself treated as an asset acquired at completion, valued at that date, with a second disposal when the payment comes in. That is the principle from Marren v Ingles, and the difference between the two treatments is significant enough to be settled with your own tax adviser before heads of terms rather than after.

Business Asset Disposal Relief has been 18% since 6 April 2026 on qualifying gains up to a £1m lifetime limit, and the completion date governs the rate. How much of your consideration falls within the relief, and whether the later payment qualifies at all, depends on how the earn-out is structured, which is one more reason the tax conversation belongs at the drafting stage.

On duration, two years is common and three is the practical limit for most sellers. The longer the period, the more of the outcome depends on decisions taken by somebody else, and the more likely it is that a perfectly reasonable change to how the group operates quietly moves the target. There is also a compliance cost to consider in any given period: the transition to Amendment 4, with the previous version of BS 7671 withdrawn on 15 October 2026, will put training and re-assessment through somebody's profit and loss account this year, and the agreement should say whose.