Q&As

What are the advantages and disadvantages of earn-outs for the buyer and seller in a share sale and purchase?

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Produced in partnership with Julian Henwood of Gowling WLG
Published on LexisPSL on 21/03/2017

The following Corporate Q&A produced in partnership with Julian Henwood of Gowling WLG provides comprehensive and up to date legal information covering:

  • What are the advantages and disadvantages of earn-outs for the buyer and seller in a share sale and purchase?

What are the advantages and disadvantages of earn-outs for the buyer and seller in a share sale and purchase?

Earn-outs are most useful where the business being sold is difficult to value with accuracy. This may be because the business is too new to have built up a 'track record' or a number of sets of audited accounts, or for other reasons (eg the profits or losses of the business fluctuate in an unpredictable manner due to the nature of the business).

In a typical earn-out transaction, the buyer will pay an agreed amount on completion of the acquisition (perhaps reflecting, for example, the ascertainable net value of the assets acquired), with an amount of deferred consideration being payable at one or more later dates depending on the performance of the business over an agreed period post-completion.

The parties will have to agree on how that performance will be measured. This will require:

  1. agreement on the basis of the accounts for

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