In an M&A transaction, there are various ways in which payment of the purchase price can be structured. Continuing uncertainty about the current value and future performance of businesses along with difficult credit market conditions have pushed buyers and sellers to include earnout provisions as a valuation-bridging mechanism in merger and acquisition (M&A) deals.
Earnouts alleviate concerns on both sides of a deal about tendering or receiving a fair purchase price. Earnouts can allow either an upward price adjustment post-closing – when sufficient value is created to justify a higher purchase amount – or creative financing for an originally agreed upon price. Although earnouts add additional complexity to M&A transactions, they are an appealing option when buyers and sellers cannot agree on valuation or buyers cannot readily finance an attractive acquisition.
This course will illustrate these purchase price provisions in detail and explore how they can affect the negotiating leverage of the parties; the tax and accounting treatment of the transaction; the securities laws ramifications of the acquisition; and the relationship of the buyer and seller after the closing.