Co-authored by Aishwarya (Law Intern)
Introduction
During any business transaction, differing expectations of the
buyer and the seller on the value of the entity is bound to arise.
Earn-out transaction1 is a mechanism which helps to
achieve a balance between such differences and protect the
interests of both the parties concerning the pricing of the
business. Usually inducted into contracts by way of a deferred
consideration clause, it acts as an economic risk allocation
instrument as it gauges the value of an investment at a future
date. This kind of transaction entails withholding a part of
purchase consideration for a business in an escrow account which
shall be released pursuant to achievement of certain performance
milestones which are usually profit and EBITDA ('Earnings
Before Interest, Taxes, Depreciation, and Amortization')
targets. Revenue metrics are not the only key consideration;
retention of key managerial personnel, who the acquirer believes
shall
