Tag archives: earn-outs

Earnouts: Sharing Risk and Reward in Uncertain Times

The turbulent economic environment resulting from the COVID-19 pandemic has affected the M&A world in numerous ways. Among them is the increased focus on earnout provisions, both those in place from legacy deals and those being considered for inclusion in an upcoming transaction. This post provides an overview of the earnout mechanism and describes the alternative approaches dealmakers have at their disposal.

The purpose of an earnout is to allocate risk and reward between a purchaser and a seller in respect of the post-closing success of the acquired business. Earnouts are useful as a means of bridging the valuation gap: … Continue Reading

Smart contract applications in M&A: earn-outs

This blog has previously provided an overview of how blockchain technology and smart contracts might be adapted to the legal industry. In this post, we will explore the specific example of how these technologies may be able to simplify an earn-out agreement in an M&A transaction.

What are earn-outs?

In an earn-out, the seller of a business receives additional compensation after closing if the business meets certain financial goals. To put it simply, an earn-out is a series of “if-then” statements that determine how much the seller is paid based on different factors.

How smart contracts may help

Inherent in … Continue Reading

Earn-out trends: continued

Back in April 2015, we discussed key questions to keep in mind when negotiating earn-outs, and looked at recent trends coming out of the American Bar Association’s 2014 Canadian Private Target M&A Deal Points Study (the 2014 ABA Study). As the ABA has now published its 2016 study (the 2016 ABA Study), we thought it may present a good opportunity to revisit the topic and look at some key earn-out trends.

General use of earn-outs

The 2016 ABA Study showed a decrease of earn-out clauses present in the transactions surveyed down to 17% from the 25% level in … Continue Reading

Tax considerations for earn-outs and reverse earn-outs

As we have previously noted, earn-outs are becoming an increasingly common part of M&A deals, and there are a number of key commercial questions to consider when negotiating them. But there are also tax consequences that must be considered when structuring earn-outs.

Earn-outs link a portion of total purchase price to the performance of the business following the acquisition. In effect, the purchaser will hold back a portion of the purchase price, and if specified targets are achieved, all or a portion of the held-back purchase price will be paid to the seller. In contrast, a reverse earn-out requires the … Continue Reading

Shareholder representatives in M&A

The post-closing process can be complex and time consuming. Hiring a professional independent shareholder representative to manage post-closing matters, such as purchase price adjustments, indemnification claims, earn-outs and escrow management, may be beneficial for target shareholders and management. In recent years, shareholder representatives have been commonly used in the U.S., and they are becoming increasingly common in Canada.

There are many benefits to hiring a shareholder representative to deal with post-closing matters:

  • Avoid conflicts of interest. When the purchaser decides to continue to employ target executives and management post-transaction, there is an inherent conflict of interest for the target
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Negotiating earn-outs: five key questions to keep in mind

The inclusion of an earn-out clause in a purchase agreement can be a useful tool to help bridge the valuation gap between buyer and seller. Broadly speaking, an earn-out ties a portion of the purchase price to the performance of the business following the acquisition, which the seller can “earn” by meeting post-closing performance targets. According to the American Bar Association’s 2014 Canadian Private Target Mergers & Acquisitions Deal Points Study (the 2014 ABA Study), earn-out clauses were present in 25% of the transactions surveyed, a slight increase from 21% in the American Bar Association’s 2012 study and a … Continue Reading

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