Negotiating Earn Out Provisions

Christopher Flanagan & Andrew Hughes participated as course leaders for the Institute for Strategic Negotiations on February 25, 2016. Their course was titled "Negotiating Earn-Out Provisions." 

Earn-outs are often crucial for consummating acquisitions because they can bridge gaps in valuation perspectives. Earn-outs are helpful in achieving smooth transitions in the ownership of a company. Earn-outs are a convenient tool for slowing down acquisition negotiations. Finally, earn-outs are an effective gambit for serial acquirers since they disguise preceding acquisition prices.

This webinar was unique in that not only are general earn-out structuring and negotiating issues discussed, but many practical insights were imparted relative to the associated taxation issues.

The following are among the issues raised relative to negotiating earn-out structuring options:

• Even when well represented by a taxation professional, why is it important that a seller be involved in designing the earn-out tax strategy?
• How can buyers and sellers come to an understanding regarding the control of the business unit upon which the earn-out is based?
• Which instruments can be used to secure earn-outs?
• What could an adverse consequence of a seller missing the first milestone be?
• Can a buyer have an option to buy out an earn-out?
• What credit facility-related issues should be discussed when negotiating earn-outs?
• What are offset rights and how might they impact negotiations surrounding earn-outs?
• What are acceleration events? Who should seek them, the buyer or the seller?

The following are among the taxation issues—that may arise in relation to earn-outs—that are discussed during the session:

• How can the characterization of consideration enable the buyer to reduce its tax liabilities, and therefore pass more consideration to the seller?
• What are some of the assets that are excluded from installment sale treatment?
• What are some of the risks of putting cash in escrow accounts to secure earn-outs?
• What are some of the consequences of pledging installment notes as collateral for loans?
• When can a taxpayer be liable for interest on deferred tax liabilities related to earn-outs?
• What are the risks associated with putting dollar caps on earn-outs in terms of income recognition?
• What are the pros and cons of specifying outside time limits to receive earn-outs from a taxation point of view?

For more information, please click here.