Earn-Outs in Security Deals: Structure and Small Print

What deferred consideration is actually insuring against

An earn-out, where part of the price is paid later and only if the business hits agreed targets, exists because the buyer is purchasing income it has not yet collected. In this sector that means a contract book, a monitoring base and a workforce, all of which could look materially different a year after the person who built the relationships has gone. Deferring part of the price is how a buyer shares that risk with the only person able to reduce it.

Owners tend to read the structure as distrust and it is better read as arithmetic. A buyer paying everything at completion has to price in the worst plausible outcome, which means a lower headline number. A buyer paying part later can afford a higher total, because it is only paying the higher figure in the circumstances where the higher figure was justified.

The proportions vary, and in owner-managed security deals a substantial payment at completion with the balance over one to three years is the common shape. What matters far more than the proportion is what the balance is measured against, and that is where most of the disappointment in this trade originates.

There is a version of the conversation worth having early. Ask what the buyer would pay with no deferral at all, and compare that with the expected value of the structured offer rather than with its headline. Plenty of owners discover they prefer the clean number, and the ones who do not at least know what the deferral is costing them.

The clauses that decide whether the second payment lands

The measure comes first. Retained recurring revenue is the fairest basis in a security deal, because it tracks the one thing keeping an acquirer awake and it stays largely within the seller's influence during a handover. Profit-based measures are more common and more dangerous, since the buyer controls the cost base after completion and can allocate central overhead in ways that were not in anybody's model.

Then the conduct provisions: what the buyer may and may not do to the business during the earn-out period. Whether it can move accounts onto its own alarm receiving centre, rebrand, change the service model, transfer staff between entities, or re-tender the insurance. Each of those can move the measure without anybody acting in bad faith, and the protection is a written commitment to run the business substantially as before.

Then the exclusions, which are where security deals differ from most. Accounts lost because a site closed or a client went into administration should not count against the seller. Accounts lost because the buyer repriced them, or failed to complete a signalling migration on a base it had agreed to migrate, are a different matter. Naming those categories at heads of terms, when the main points of the deal are first written down, takes twenty minutes and saves an argument eighteen months later.

What could move your earn-out between now and payment

Two sector-specific items are worth modelling into any earn-out being agreed this summer. The first is signalling migration. The analogue network is withdrawn at the end of January 2027, and the cost of holding a legacy line has climbed sharply across this year, with Openreach raising wholesale line rental by twenty per cent from April and a further forty per cent from July, with another rise scheduled for October. An unmigrated tail is now both a cost and a churn risk during precisely the period an earn-out is measured.

The second is regulation. The Terrorism (Protection of Premises) Act 2025 moved a step closer this June: commencement regulations brought the Security Industry Authority's duty to produce, publish and review guidance into force from June 2026, and the regulator has consulted on that guidance with final publication expected in the autumn. Duties on premises themselves follow later, so the near-term effect on a security business is enquiry volume rather than obligation.

Both of those are reasons to be specific rather than reasons to be anxious. If migration work is expected to depress a measured figure in year one, say so at heads of terms and agree how it is treated. If a regulatory cycle is expected to lift enquiry volumes, neither party should be relying on it. An earn-out negotiated against named variables is a commercial arrangement; one negotiated against a general expectation that things will carry on as they are is a disagreement with a delayed start date.

Profit-based earn-outs are more common and more dangerous, because the buyer controls the cost base after completion.

For the stages of a sale, from the first confidential approach to completion, see how Simon Read runs a sale.