In addition, from the point of view of the seller who loses control of the purchasing area, restructuring (e.g. B a merger of the object of sale with another company of the buyer) for a certain period of time or to allow restructurings only if an agreement to adapt the Earnout clause has been concluded beforehand. Non-financial ratios, such as. B the maintenance of customer relations, can be obtained to determine the variable elements of the purchase price (e.g. B if the determination of the purchase price is based in one way or another on these customer relations). Determining the purchase price of the target company is a central theme of M&A contract negotiations. The parties must agree on the valuation and profitability of the target company, despite the uncertainties surrounding its future economic development. In order to take account of this uncertainty, the Earnout clauses provide for the obligation for the buyer to pay, under certain conditions, an additional amount to the agreed purchase price (i.e. a variable “earnout payment”) at the end of the spa. There are a few pitfalls to consider when agreeing or designing earnout clauses. It is necessary not only to attach a precise calculation formula to determine the purchase price, but also to indicate in detail how the payment of the Earnout is calculated in order to avoid any manipulation of the calculation bases.
Otherwise, there will most likely be disputes between the parties. In general, in addition to the period of determination of the achievement of the agreed ratio (triggers the payment of earnout), it is necessary to have possible obligations, rights of control, obligations of publicity (for example.B. in what period the person who must draw up an initial balance sheet) as well as any opposition deadlines must be explicitly defined. With regard to the agreed ratio, the parties must also agree on accounting principles and clear rules for determining the agreed financial ratios, for example. Β whether gross or net turnover should be taken into account or whether discounts, charges, sconti and other reductions in turnover should be taken into account. Financial and non-financial indicators can be used to determine Earnout`s additional payment. . For more than ten years, there has been discussion about the revision of company law and therefore the introduction of the virtual meeting of members.
Do you need legal, tax or compliance advice? We look forward to your contact. It is also recommended to define in the SPA the decisions that the buyer can or cannot make with regard to the management of the sold business, as well as the decisions that can only be made with the agreement / consultation of the seller. Transaction Risk Management – General explanations on the different nature of transaction risks (Part 1) Are you looking for a competent partner to fully advise you in your M&A transactions? Our MME M&A team is at your disposal to help you in your transaction and safeguard your interests – holistic, proactive and pragmatic. In particular, the financial indicators used for the calculation of the Earnout payment must be clearly defined in the PPS. Earn-Outs as a tool to overcome differences in price expectations when appropriating the company. Turnover is the simplest value to determine among financial indicators. Turnover reflects only revenues. However, costs are not included. Additional financial ratios can be deducted from the income statement (e.g. EBITDA.B, EBIT, profit before tax) or cash flow account. EBITDA or EBIT are often used in traditional transactions because of their high importance. What both financial indicators have in common is that they indicate economic profitability at the operational level, but, unlike turnover, they take into account the evolution of costs.
. . .