Company acquisition agreements with performance-based price adjustment mechanisms (Earn Out)

Recently, we have been reading in the economic press about many transactions in which the consideration for the reported acquisition is not final and it is possible that the sellers will actually receive a higher amount subject to meeting certain conditions. Below is a brief and exhaustive explanation of the price adjustment mechanism behind these transactions.

The slowdown in the global economy in general and in the technological sector in particular has led to ever greater discrepancies in valuations between buyers and sellers of companies. Buyers are now less likely to bet on future deals and prefer to focus on examining historical business results and tangible factors of past activity.

On the other hand, corporate sellers perceive their businesses and companies as being underestimated as a result of general market conditions and claim that the correct assessment must take into account future prospects. In dealing with the risks of the parties in a business acquisition transaction, a careful formulation of future performance-based price adjustment agreements called "Earn Out" agreements may provide the mechanism for bridging the gaps and enabling transactions.

The earn-out agreement between the buyer of the business and the seller is paid by the buyer to the seller after certain performance targets have been met after the sale Earn-out is the way a buyer can make part of the purchase amount in future performance.

The price adjustment mechanism, as a function of the company's performance in the year following the transfer of control, is a mechanism in which the buyer agrees to pay the seller an additional amount if the acquired company's spirit meets certain objectives. (2) to a seller who presented pink presentations regarding the expected future of the acquired activity and the purpose of the mechanism is to pay certain amounts only if his optimistic forecast is realized, And / or (3) to the seller who remained in the field after the transfer of control and the purpose of the mechanism to encourage him to contribute to the performance of the activity after the transfer of control.

These agreements may take about five years, when the calculations are usually between 10% and 30% of the purchase price of the business. Under certain circumstances, however, the percentage may reach half of the purchase price. Earn-out goals may be based on various factors, including gross income, net income, profits, cash flow, and the creation of new customers. Goals can also relate to a specific project or completion of any activity, closing a particular sale, or launching a product.

You may want to sell your company outright, but finding a buyer who can agree with the valuation of your business and its future prospects may not happen. With an Earn-out agreement, you get prepaid with potential for additional payment when agreed financial goals are met. Under the best circumstances, both buyer and seller experience a win-win situation when the seller gets a fair price for the business with the potential for obtaining additional funds while the buyer pays what he feels the business is worth, with additional payments resulting from successful financial results. In many cases of Earn-out agreements, the seller remains involved with the company until the end of the Earn-out period.

If you are considering an Earn-out agreement with your company purchaser, you should understand the risk factors. You will continue to work for a company that you no longer control, and you are no longer making the big business decisions in the company. If the buyer makes risky or bad business decisions, your extra profit is in danger. Many Earn-out agreements include non-compete clauses, so you can not immediately start or join a similar activity immediately after the sale.

To protect your interests, we recommend that you work with an experienced M & A attorney to ensure that you receive the highest possible advance payment and make sure that the agreement sets out exactly what goals you need to meet under the Earn-out. Yes, make sure you have your own employment contract so that the new owner cannot easily download or exchange you.