Peter Rayney highlights some pitfalls to avoid when selling a company, where the deal involves an earn-out.
Corporate sales taking place in the midst of the Covid-19 pandemic frequently include some form of ‘earn-out’ mechanism.
Wary purchasers will only be willing to agree a deal based on the future (increased) profits or turnover when they are actually delivered by the target business. On the other hand, sellers tend to believe that they are selling their business ahead of its maximum profit potential.
What is an earn-out?
Earn-out arrangements provide a helpful solution to this so-called ‘price gap’ issue. By incorporating an earn-out as part of the pricing mechanism for the purchase of the shares or goodwill, the seller’s and purchaser’s requirements can be satisfied.;