Closing Accounts Earn Outs Closed Box Notes

Price is determined at completion of the transaction and it is subject to the values contained in the Closing Accounts.

¿Who?S’s accountant usually drafts first set, as they are familiar with the Co, but the B may prefer to have its own accountants do it as it allows greater financial scrutiny (improve their negotiation position)

Part of the consideration is giving at completion and other depending on the success of the Co. (S’s Ds manage the Co. for a while after completion )

¿Who?B’s accountant usually prepares the accounts for each period; payments are calculated by thresholds achieved or by a multiplier. Need to have accurate definitions e.g. “net profit” or “closing assets.

• A fixed price has been agreed before completion

• May be paid in installments

• there might be a retention of the PP (perhaps because there is a threatened liability and B knows of it)

Buyer’s view:

• B isconcerned over accuracy of S’s accounts (stock, assets, debts valuation) thus B wants to know it is paying for what it is getting “tune up the PP”.

• B wants an up-to-date picture of the value of the Co. at completion (S’s accounts may be old)

• Bringing a claim under a warranty (e.g. because stock not in condition as warranted by S) is a lot more cumbersome and expensive than sorting this out in advance via balancing payment/refund

Seller’s view:

• S may get a better price e.g. if the assets/shares were originally undervalued.

• Protects S from having to defend a warranty claim in the future. Completion = quicker.

• S may have a say how the assets/shares are valued

Buyer’s view:

• the Co. may be a new venture and B wants to make sure it is successful

• Prevents B overpaying for a Co. that does not live up to B’s expectations

• Motivates S/managers to help the Co. perform highly (also if Co.’s managers are paid in shares in Holding Co.)

• Private equity B’s or Private Co.’s often use this method

Seller’s view:

• S’s want to prevent B from reducing value of Co. during the earn-out,

• S wants to protect profit. S wants to stay in Co. to enable profit targets to be met and prevent B from undermining short-term profit e.g. by investing in R&D, substantial asset disposal/purchase

• The deferred payment will affect S’s tax liability (see tax note “your lpc”)

• Secure Co.’s outstanding payments

• Restrictions on intra-group transfers

• Restrict material change of business after completion = prevent devaluation

• it is the simplest, quickest way to valuate a Co.

• commonly usedin share acquisitions before SPA is signed.

• attractive for S but riskier for B whose only opportunity for priceadjustment after completion is by bringing a valid warranty claim.

• B is wise to include provisions in the SPA toprotect against ‘leakage’ –i.e. seller extracting value from the target between signing & completion.

• Leakage’ examples: payment of a dividend, unsanctioned transfer of assets to target SHs, or inappropriate payment of expenses by the target.

• S will usually be obliged to undertake to repay such ‘leakage’ to B on a pound for poundbasis.