Price adjustment and payment mechanics
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The issue of a target’s price and payment mechanics is always one of the most important (if not the most important) for both seller and buyer. To make everyone happy and divide risks, some use such tools as earn-out clause (e.g. if the target is performing above agreed level after closing the deal, the seller shall receive part of its profits). What other tools did you use in your practice?
Hi,
Probably the seller can re-invest in the target company with a minority share. The seller, then may benefits proportionately and indefinitely from the further success of the target company.
Retention payments are also a great way to shift some of the compensation out of the purchase price, limit the tax impact of the acquisition and ensure that key personnel will continue to support growth and success of the company post-close.
THe valuation and pricing mechanism is always one of the key issue the board of director emphasizes. To have fair value and shared-risk concept between seller and buyer, the earn-out clause is one of the tools to meet this concept. Basically, if the target performs better than agreed level post-deal, the seller can receive part of the profit. This will have an incentive for smooth integration.
Hi Ievgen,
earn-out are typical payment systems. I am also coming accross deferred payments based on the business plan projections (the one that drives the valuation). Partial payment is paid upfront (let´s say 60%) and the remiander is paid in installements in the next couple of years (2 additional years at 20% each). The seller has to remain in the business for the next two years helping to get the business going and searching for synergies that supported the transaction price.
If not achieved, there wil not be any additional payments and they will be considered a price adjustment.
Best regards
Pedro
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