ARTICLE · 12 MAY 2016

Earn-Out Constructs: Getting The Matrix Right

Duane Morris LLP

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Duane Morris LLP

When there is disagreement over the profitability or future earnings prospects of a company being sold, buyers and sellers may choose to use an earn-out mechanism to bridge their differences.

SingaporeCorporate/Commercial Law

Duane Morris

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"The carrying power of a bridge is not the average strength of the pillars, but the strength of the weakest pillar." – Zygmunt Bauman

When there is disagreement over the profitability or future earnings prospects of a company being sold, buyers and sellers may choose to use an earn-out mechanism to bridge their differences. An earn-out mechanism allows part of the purchase price to be based on a company's future performance. Earn-outs are popular in transactions that are people- or services-based, or that involve businesses with good prospects but a short track record.

However, earn-out mechanisms should be properly structured in order to lower the risk of future disputes. This should be a joint task undertaken by buyers' and sellers' legal counsels, accountants and financial officers.

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Earn-Out Constructs: Getting The Matrix Right

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