partner feature
redundancy payments). Minimum payment In 3M, the upside value of the business for the sellers was wholly dependent on achieving the earn- out.
At the time of the transaction in
early 2007, the parties estimated the 2009 net sales to be over £17m. After approximately 18 months of 3M ownership, 3M were estimating sales of $1m. This meant that the net sales forecast declined precipitously during a period in which the sellers had no involvement and the sellers were expected to bear the entire risk of this. Sellers may therefore wish to
consider negotiating a minimum level of earn-out payment in circumstances where the buyer has complete control of the business during the earn-out period. Impact of other acquisitions The parties should discuss whether any expansion or reduction in the scope of the acquired business (for example, through acquisition, organic expansion, or the disposal of non-core businesses) will be permitted and, if so, the impact of these on the earn-out. Accounting principles and policies The parties need to agree on the accounting policies to be applied in measuring the performance of the business. These will usually be the policies
applied by the business before completion, subject to specific adjustments, which may be agreed to ensure that the earn-out is achieved through the satisfactory performance of the acquired business. Consideration should be given to
how to deal with matters such as the costs not incurred in the ordinary
THEbusiness QUARTER 11
course of business, non-recurring items, and profits or losses arising on the sale or revaluation of assets or on foreign exchange movements. It is also important to ensure that
the policies set out in the relevant agreement reflect those applied by the parties in preparing any forecasts which they have used in setting the performance targets for the earn-outs. This will avoid the situation
where the business performs in line with expectations but the agreement produces a perverse outcome on whether or not an earn-out payment is due. Wider considerations Although earn-outs can be useful, they do give rise to a significant number of tricky commercial, legal, tax and accounting issues, which should be carefully considered by the parties to ensure that they fully understand how the earn-out provisions will operate in practice. How best to
address these issues will very much depend on the specific circumstances in question. It will always be
important to consider ways in which the earn-out could be manipulated, and then seek to deal with these in a manner that is satisfactory to the parties.
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