The following Tax practice note provides comprehensive and up to date legal information covering:
An earn-out is a particular way of structuring the consideration payable for the acquisition of shares in a company (the Target) where at least part of the price is to be calculated by reference to the Target's performance over a period of time following the acquisition. In transactions involving an earn-out, the purchase price given by the buyer for the Target's shares will typically include:
an agreed amount of initial consideration payable upon completion, and
an unascertainable amount of earn-out consideration payable over, or at the end of, the earn-out period
The initial consideration and the earn-out consideration may be payable wholly in cash, in shares or loan notes issued by the buyer (or a connected company) or in any combination thereof.
The earn-out element is often calculated by reference to the Target's profits over a specified period, such as the next two or three accounting periods following completion of the sale. It is also possible, but less usual, to link the earn-out to turnover, net assets or some other financial measure which is appropriate to the transaction in question. Earn-outs are generally used in acquisitions where the future performance of the Target is the key to justifying and agreeing the sale price. They are also common where the Target only has a short track record.
An earn-out right of individual selling shareholders may constitute:
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