Structuring Earn-Outs In M&A Transactions

Introduction

In the context of merger and acquisition (M&A) transactions, buyers and sellers are always looking for ways to ensure that they each receive full value. Generally, sellers are asked to make certain representations about the status of the target business from which buyers determine the prospects of the business they are acquiring. An inventive way that the parties to M&A transactions have come up with to try to mitigate the risks the buyer is taking on, including to ensure that the purchased business continues to generate the revenues the buyer is expecting, while at the same time providing the compensation that the seller believes is fair, is through the mechanism of an "earn-out" provision in the purchase and sale agreement.