The pros and cons of earnouts

An earnout agreement is used to reduce risk associated with a business purchase. Parties will negotiate an earnout contract in which the seller receives additional payments if the acquired business meets certain goals. Whether earnouts are beneficial to both parties depends on the structure of the a...

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Bibliographic Details
Published in:Journal of financial service professionals 2001-11, Vol.55 (6), p.88
Main Authors: Del Roccili, John A, Fuhr, Joseph P
Format: Article
Language:English
Subjects:
Acquisitions & mergers
Advantages
Agreements
Contract negotiations
Corporate profits
Corporate tax planning
Costs
Disadvantages
Expected values
Incentives
Litigation
Purchasing
Sale of a business
Wages & salaries
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Summary:An earnout agreement is used to reduce risk associated with a business purchase. Parties will negotiate an earnout contract in which the seller receives additional payments if the acquired business meets certain goals. Whether earnouts are beneficial to both parties depends on the structure of the agreement. This paper focuses on the benefits and costs of various earnout structures and provides a case study based on actual litigation.
ISSN:1537-1816
2381-8875