10 things to think about as you sell your business with deferred compensation

1. You have just received a large lump sum, but probably not all at once

You’ve sold your business, but the reality of that liquidity is often more complex than it first appears.

Increasingly, transactions involve deferred consideration over multiple years rather than a single upfront payment. This can often be the structure of a conventional sale, or with some element of seller financing, such as the case with Employee Ownership Trusts. 

While these structures can align incentives and unlock additional value over time, it also introduces a new layer of financial complexity. Your wealth is no longer illiquid, but neither is it fully accessible. Navigating that transition from business owner to ‘steward of staged capital’, requires careful planning around cash flow, risk, and investment strategy from day one.

Before thinking about investment strategy though, you need to map your personal cash flow carefully and, related to this, how you want to think about investment risk. 

Key areas to think about include the timing of the tranches, whether they are index-linked and to what inflation metric, what happens if the business has a bad year and any caps or floors in payment calculations. 

Your investment plan needs to work around a strategy that’s structured, not immediate, which might change everything about how you deploy capital in the early years.

Case study example: In a recent case, we structured the investment solution for a client such that the initial payment covered some liabilities and started to build out their investment assets but started at the lower end of the risk spectrum. Whilst this might mean missing out on some investment growth in the early years, it also does something far more valuable. It delivers on the client’s short-term objectives of using the proceeds of the sale to clear liabilities, make gifts to family members and then invest for income, now that their drawings from the business have ceased. 

As future EOT, earn out or loan payments come in, the additional capital can be allocated towards riskier investment assets to start driving returns. If those payments don’t materialise, the client doesn’t have the double whammy of business risk and market risk. 

2. Concentration risk hasn't disappeared, it has just changed shape

For most owners, their business was perhaps 80–90% of their net worth. After a sale of the nature described here, that concentration risk hasn’t gone, it has simply converted into a future liability secured against the same business. From equity to debt, if you prefer. 

Until those proceeds are fully repaid, your financial wellbeing is still heavily tied to the performance of the company you just sold. A true diversification strategy only begins once the deferred consideration has been received and reinvested.

3. What’s this money actually for?

This sounds obvious but is rarely answered clearly – at least in the early stages of post-sale. Is this your retirement fund? A legacy you want to pass to children or younger family members? Money you intend to reinvest into other businesses? The answer determines everything. Your time horizon, risk tolerance, liquidity needs, and the right vehicle and strategy for each. A founder who is 52 with active income from a consultancy role has a completely different investment mandate to one who is 70 and needs the proceeds to fund their lifestyle from day one, or who may have family or health concerns to balance. 

As this purpose becomes clearer, execution of your investment strategy will become better and better. It’s not unusual for a plan or strategy to go through a few minor iterative changes in the first few years after the sale. 

4. The capital gains tax exemption is valuable for sales to Employee Ownership Trusts. Don’t squander the benefit through poor planning

The potential absence of capital gains tax (CGT) on the sale of a business to an employee ownership trust (EOT) is a significant structural advantage of the transaction. However, that benefit can be eroded quickly through poor investment decisions, unnecessary income tax drag, or failure to use available allowances and wrappers. 

ISAs, SIPPs, VCTs, and EIS investments all become potentially relevant tools. The question is how to invest in a tax efficient manner so that the initial benefit provided from the lack of CGT isn’t then unwound over subsequent years. 

5. Reinvestment risk is real

Founders who have built a business over many years have a deep, intuitive understanding of one asset. They now face deploying capital into markets they know far less well. This is often at exactly the moment they feel most financially confident and with less time to recoup any investment losses. This is a dangerous combination. 

The discipline required to build and stick with a diversified portfolio – accepting lower potential returns in exchange for resilience – is psychologically very different from the concentrated, high-conviction approach that built the business in the first place.

Good guidance is key to getting this right. As is moving slowly. Many business owners gained an edge over the years from moving quickly. At this point in your financial life, sometimes slower can actually be better as mistakes here can be expensive. 

6. Income replacement: what does your P&L look like now?

 

Many founders conflate their salary, dividends, and business perks into a blurred sense of personal income. Post-sale, that structure disappears. You need a clear picture of what your actual cost of living is, what income the investment portfolio needs to generate, and whether that’s sustainable at a sensible withdrawal rate. 

Drawing too heavily from capital in the early years, particularly if deferred consideration is still outstanding, can permanently impair long-term wealth.

7. The business is still your biggest risk - what happens if it fails?

Deferred consideration is essentially a creditor position against a business that you no longer control. If the business deteriorates, struggles to service debt, or fails entirely, your outstanding loan note is at risk. Have you taken security over assets? Is there a charge in place? Does your overall financial plan have sufficient resilience that a partial or total loss of outstanding consideration wouldn't be catastrophic? This isn’t pessimism; it’s prudent structuring. 

Scenario planning like this isn’t something to think about after the sale. These are pre-transaction considerations. However, the nature of these agreements will have a big impact on the decisions you can make after the sale, for many years after the actual transaction. 

8. Inheritance tax (IHT) planning starts now, not later

A successful exit can potentially move a founder from a position where Business Property Relief sheltered some of their estate, to one where they hold a large portfolio of investment assets that may be fully exposed to inheritance tax. This is one of the most significant and underappreciated consequences of a business sale. 

Our IHT rules are complex, and this exercise is often best tackled in multiple stages, requiring a lot of time to achieve. Putting thought into this earlier than you think you need to, is generally a good idea. 

9. Investment governance: who is on your team?

Business owners are accustomed to having skin in the game and a board around the table holding decisions to account. Investment portfolios rarely have that discipline unless it’s deliberately built in. Who is your investment manager? What is their mandate? How is performance measured, and against what benchmark? How often do you review? Treating the investment portfolio with the same strategic rigour as you ran the business is the difference between wealth preservation and wealth erosion.

Aside from investment performance, there can be a wider point on structuring your wealth team (as opposed to your business team). Put genuine thought into:

• Who would be your primary ‘go to’ adviser?
• How advisers interact with each other?
• Are the corporate objectives of each of your advisers aligned?
• How well does your ‘team’ communicate with each other?

10. Identity and purpose - the underestimated strategic risk

This isn’t a financial point, but it’s the one that most often derails the others. Owners who have built a business over decades frequently find the transition to being a capital allocator, rather than an operator, deeply disorienting. 

Poor investment decisions, overactive trading, unnecessary new ventures, and excessive risk-taking are often symptoms of this rather than genuine strategy. The best wealth managers understand this and help clients build a post-exit life with structure, flexibility, purpose, and a clear sense of what the capital is for. It’s as much a coaching conversation as a financial one.

Bringing it all together

Selling a business with deferred consideration isn’t a single event, it’s a multi-year financial transition. The decisions made in the early years often have an outsized impact on long-term outcomes. Getting the structure, risk profile, and governance right from the start can mean the difference between preserving the value you’ve created and gradually eroding it. 

How we can help you