An earn-out arrangement is one where all or part of the price for acquiring a business is based on the business’s future performance. This part of the price is unascertained at the time of completion and is typically measured by the increase in one or more metrics over a period of time. For example, the metric might depend on EBITDA, total revenue under new contracts, the retention of certain key contracts, profitability or a combination of these.
If you have sold a business in exchange for a future earn-out payment or you have bought a business on the basis of retaining the seller’s skills to achieve certain outcomes, there might be a benefit in varying the earn-out arrangement that you have reached.
Earn-out renegotiation could benefit the buyer and/or the seller
The following benefits may result from a renegotiation.
Earn outs are sensitive from a tax perspective and altering a deal without formal advice could have a number of disadvantages.
There may be much to be said for reconsidering earn-out rights at the present time – and when doing so it is key to remember that the optimum outcome will depend on the tax consequences of any change and the broader terms of the share sale agreement.
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