Consideration

Consideration is the form in which the purchase price is paid in a transaction. It can be cash, shares, or a combination of both. The type of consideration affects risk and tax consequences for both sides.

In practice consideration often consists of several building blocks: a cash payment at completion, a deferred portion, a holdback securing warranty claims, a performance-based earn-out, a vendor loan and a rollover of the seller into the acquisition vehicle. Each element shifts risk and timing of receipt, so two nominally equal offers can be economically very different. A lower all-cash price is worth more to many sellers than a higher one with a long earn-out. For listed buyers the choice between cash and shares is at the same time a balance sheet question and a matter of earnings per share dilution. Tax treatment matters considerably: the timing of taxation does not automatically follow cash receipt. A share-for-share exchange may qualify for tax deferral under specified conditions. The seller also faces a security question: payments received later depend on the buyer's creditworthiness and the survival of the business and are therefore often backed by guarantees, escrow accounts or collateral.

In auctions the structure of the consideration is consequently compared just as carefully as the headline amount. In assessing an offer it is advisable to convert all components to a present value at completion, discounting deferred and contingent elements and weighting them by probability. Only that calculation makes offers with different structures comparable. Tax consequences must also be reflected, because the timing of taxation differs by component. For the seller it is additionally decisive what share is paid at completion without further conditions.

Note: This explanation is for general information only and does not constitute tax advice. Tax treatment depends on the individual case and may change with new legislation. For a binding assessment, please consult a qualified tax adviser.