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Earn-outs in M&A transactions: working hard for capital treatment?

Tomás McGrath and Dominic Robertson (Slaughter and May) discuss pitfalls and practical tips when considering earn-outs in M&A transactions.

An earn-out is a form of deferred consideration and may be used as a mechanism in private M&A transactions for various reasons including to deliver value to sellers where some (or all) of those sellers are individuals who will continue to be employed by (or act as directors of) the target business following acquisition (the seller-managers). An earn-out provision in the purchase agreement will mean that at least part of the purchase price for the target is payable upon the occurrence of future events usually dependent on the performance of the target business post-sale.

Earn-outs are often used in private equity transactions where part of the value of the target lies in the retention of the existing management and commercially are often seen as helping to...

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