Why Earn-Outs May Become More Popular In Negotiated Sale Transactions

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Executive Summary

The ongoing economic crisis has created deep uncertainty about the future performance, and current value, of many businesses. One technique deal-makers may consider using to bridge disagreements between prospective buyers and sellers of businesses over valuation is the "Earn-out." With an earn-out, a portion of the purchase price is paid after the closing, contingent in whole or in part upon the target company's economic performance or achievement of non-economic milestones during the post-closing period. The earn-out may provide for the payment of a fixed amount of compensation upon the target's satisfaction of a specified performance criterion, or, more typically, a specified percentage of the amount by which the target's performance exceeds an agreed performance threshold.

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