Structuring an M&A Transaction: Purchase Price Adjustments, Earnouts and Other Purchase Price Provisions

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.

Detailed Information

  • Overview on various types of M&A deals
  • How consideration is usually paid – e.g., cash, shares, part cash / part shares, earnouts / price adjustments following closing of the transaction
  • What is the Purchase Price?
    • Forms of consideration – cash, stock of the acquiring entity, installment notes, assumption of indebtedness, or any combination
    • Factors that will affect how consideration is paid
  • Purchase Price in Escrow
    • Why this is a holdback?
    • Benefits and risks
  • Purchase Price Adjustments
    • What are they and when were they used?
    • Purposes and rationale
    • Post-closing adjustment and construction
    • Mechanisms
    • Drafting considerations of the provisions
  • Earnouts
    • What are they and when are they used?
    • Advantages, disadvantages and risks
    • Possible outcomes of earnouts
    • Considerations and drafting issues of earnout provisions