Earn out
An earn-out clause defines a portion of the purchase price in a purchase contract that is paid at a later point in time based on success. Such clauses are mainly found in company purchase agreements .
Assessment basis
Earn-out clauses can be based on different performance indicators , but this is usually an economic parameter that is either taken directly from the profit and loss account or determined on the basis of it (but real values such as sales volume are also used as an alternative ). If an earn-out clause applies, the purchase price is divided into a base purchase price (for the shares in the company) and an additional purchase price to be measured by the earn-out clause. The base purchase price will be paid at the transition point, whereas the additional purchase price will be paid at a later point in time depending on the achievement of the performance indicators defined in the earn-out clause. Earn-out clauses are particularly problematic in cases in which the seller has little or no influence on or control over the assessment basis. In such situations, the buyer can be tempted to manipulate the size to the disadvantage of the seller. In addition, it has been shown in practice that a company to be acquired is usually fully integrated into the buyer company after the transfer of shares. The exact determination of the assessment basis of the earn-out is therefore z. Sometimes problematic, since a separate, precise determination of success can no longer be carried out in this case.
motivation
By far the most common reason why contracting parties include an earn-out clause in a company purchase agreement are different expectations regarding the future profitability of the company. To different expectations with regard to the future profitability it can z. B. come with new technologies that have not yet established themselves on the market. In addition, earn-out clauses apply if there is a high level of uncertainty regarding the company's development (e.g. in turnaround situations, in start-ups or in previous years with no economic success). With an earn-out clause, risk is distributed between the contracting parties. Earn outs are also used to bind a seller who is willing to continue to work as managing director after the change of ownership to the sold company.
Economic character
From an economic point of view, earn out clauses represent an option right (see option (Economy) ): the seller receives an additional payment in the event of a positive development in the assessment basis of the earn out clause. The value of this option can be determined using methods of financial option price theory.
Legal character
From a legal point of view, an earn-out clause is a conditional purchase price. With a conditional purchase price, a risk distribution that deviates from the law is carried out. The law stipulates that with the transfer, the economic opportunities and risks also pass completely to the new owner. With an earn-out clause, the previous owner still participates in the economic success of the sold company after the transfer.
literature
- Albert M. Riedl: The earnout approach as a method to overcome different price expectations in the context of M&A transactions. Grin, Munich 2009, ISBN 978-3-640-23582-7 .
- Markus Vischer: Earn out clauses in company purchase agreements . In: Schweizerische Juristen-Zeitung . Volume 98, 2002, No. 21, pp. 509-517 (PDF; 56 kB) .
- Raphael Mertens: Moral Hazard, Risk Sharing and Earn-Out . (PDF; 239 kB)
- Jan-Peter Heise: Purchase price adjustment mechanisms when buying a company. PDF ( Memento from November 11, 2005 in the Internet Archive )
Remarks
- ↑ L. Hölscher, A. Nestler, R. Otto: Handbuch Financial Due Diligence. Wiley-VCH-Verlag, Weinheim, ISBN 978-3-527-50295-0 , p. 361.
- ^ Theodor Baums: Result-dependent price agreements in company purchase agreements. ("earn-outs") (PDF) ( page no longer available , search in web archives ) Info: The link was automatically marked as defective. Please check the link according to the instructions and then remove this notice.
- ↑ Christian Tallau: Evaluation of earn-out clauses in the context of corporate transactions . In: Finanzbetrieb. 2009, issue 1, pp. 8-14.
