Payments in M&A transactions: what buyers and sellers often get wrong

For business owners, involved in a sale or acquisition, how payment is made is often not the main focus. Most attention goes on negotiating the deal and getting it completed. However, the details of when and how money changes hands can have a significant impact on the final outcome.

Using standard payment terms without thinking them through can reduce the value of a deal.

This article explains some of the most common mistakes we see and how to avoid them.

1. Misunderstanding completion accounts

A key mistake we often see is that sellers assume completion accounts are the default mechanism for UK M&A transactions. In practice, the market has shifted. Completion accounts are now more commonly used for businesses that are volatile, seasonal or going through operational change - where a locked box mechanism would otherwise expose one party to pricing uncertainty.

Assuming completion accounts are the norm can expose you to dispute risk, increased costs and significant time wasted in post-completion adjustment processes. Your advisors should be steering this conversation early - ideally before heads of terms are agreed.

2. Treating working capital and net debt adjustments as administrative details

Adjustments for working capital and debt are among the most common sources of dispute in UK deals, because they can significantly change the final price. Problems typically arise when accounting methods are not clearly defined at the outset or are not applied consistently across the completion accounts process.

Frequent mistakes include:

• Assuming working capital targets are generic rather than varying by industry sector and business model.
• Failing to define how key financial figures - including normalised EBITDA and cash - will be calculated.
• Overlooking debt-like items such as lease liabilities, deferred tax exposures, or early-repayment charges.
  
  

3. Over-simplifying earn-outs

Earn-outs are often used to bridge a valuation gap between buyer and seller, but without clear drafting, they are also a frequent source of post-completion dispute.

Earn-out issues we commonly see include:

• Assuming the seller will remain involved operationally after completion, without specifying their role in the SPA.
• Failing to clearly agree how performance metrics will be defined and measured.
• Failing to account for how post-completion decisions made by the buyer can affect earn-out calculations.
• Underestimating the impact of key staff departures on earn-out performance.

4. Misunderstanding escrow

Escrow is a mechanism by which a regulated third party holds funds or assets on behalf of both parties until defined contractual conditions are met. In UK M&A, escrow is widely used to manage post-completion risk - most commonly for warranty and indemnity claims, earn-out holdbacks, and deferred consideration - but it is frequently misunderstood by both sides.

Common mistakes we see include:

• Sellers treating escrow as a sign of distrust rather than a standard risk management tool - which can cause friction at a late stage in negotiations.
• Buyers over-sizing the escrow amount because they have not properly analysed the specific risks they are protecting against.
• Both parties failing to link the release of funds clearly to the resolution of the specific risk the escrow was established to cover.

What good escrow practice looks like is straightforward in principle: the amount held should be proportionate to the risk, the release conditions should be precisely defined in the SPA, and the provider should be regulated, operationally robust, and capable of moving funds efficiently when conditions are met. Using a purpose-built regulated payment provider - rather than funds sitting in a solicitor's client account - can materially speed up both the establishment and release of escrow, and removes a significant operational and compliance burden from the instructed firm. 

5. The importance of the disclosure letter

Sellers often underestimate the level of detail required in the disclosure letter; buyers often fail to consider disclosed matters properly when assessing residual risk.

Either can lead to:

• More money being held in escrow than the underlying risk justifies.
• Wider legal protections being included in the transaction documents than are necessary.
• Higher warranty and indemnity insurance costs.
• A greater risk of disputes arising after completion.
  
  

6. Assuming disputes will be resolved through litigation

Sale and purchase agreement disputes, particularly those relating to completion accounts and earn-outs, are almost always resolved through expert determination rather than litigation. Parties that fail to draft clear expert determination provisions - including the scope of the expert's mandate, the timetable, and procedural safeguards - often find themselves locked into a process that is slower and more costly than it needs to be.

Conclusion

The headline price and finding the right counterparty are central to any successful M&A transaction. But the mechanics of payment - how funds are structured, held, and released - deserve equal attention.

Buyers and sellers who want to reduce post-completion risk should:

• Use payment structures that reflect current UK market practice.
• Define clearly how all financial figures will be calculated and verified.
• Plan ahead for how the business will operate after completion.
• Use escrow and insurance proportionately and with precisely drafted release conditions.
• Ensure any dispute resolution process is workable and clearly documented.

In a market where certainty and speed matter, working with specialist regulated providers to manage fund flows can materially reduce operational and compliance risk for all parties - and the firms advising them. 

Martin Donoghue is a Partner at Branch Austin McCormick LLP, a full-service law firm based in Mayfair, London. Martin advises on M&A transactions across a range of sectors. He can be contacted at md@branchaustinmccormick.com or +44 (0) 20 7851 0126.