Earn-outs

by Practical Law Corporate & Securities

A Practice Note that discusses the use of earn-outs as a form of contingent purchase price in private M&A transactions. This Practice Note examines the advantages and disadvantages of earn-outs for both buyers and sellers, outlining when such arrangements are most effectively used to bridge valuation gaps. It explores the critical components of structuring and negotiating earn-out provisions, including the selection of financial or non-financial targets, the length of the earn-out period, and the structure of payouts. Furthermore, this resource addresses the complexities of post-closing operational covenants and dispute resolution mechanisms, which are common sources of conflict. This Practice Note also provides an overview of the accounting treatment of earn-outs, the key tax implications concerning the characterization of payments as capital gains or compensation income, and potential US securities law issues that may arise from the right to receive future earn-out payments.