1. Set rules for how business should be managed after completion

In M&A deals with earn-out provisions, sellers often continue to run the business of the target companies after completion. Sellers are incentivized to maximise the profits of the target companies to meet the performance targets for the earn-outs. However, this may not always align with the buyers’  long-term plans for the target companies.

One way to resolve this is to have a written agreement that sets clear parameters for how the business should be managed during the earn-out period. This agreement should also specify reserved matters that require the buyer’s consent after completion of the deals.

2. Clear drafting for calculation of performance metrics

The provisions outlining how performance metrics will be calculated are critical in determining whether the performance targets for the earn-outs have been met. It’s prudent to consider as many potential scenarios as possible and provide illustrations on how the calculations of earn-outs will work in the sale and purchase agreement.

3. Agree on accounting principles

Both sellers and buyers should agree on the accounting principles to be used to prepare the accounts, which will determine whether the performance targets are met. These principles should be clearly set out in the sale and purchase agreement.

This post first posted on LinkedIn on 7 November 2024.