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Payment Mechanisms Notes

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1. Fixed price ("locked box")

2. Earn-out

3. Completion Accounts NB: It is possible to have a combination of the above (e.g. completion accounts in relation to the valuation of stock, and earn-out in relation to the valuation of the company's profit)

1. Fixed price ("locked box") What is fixed price?

Is fixed price applicable on the facts?

There has been a recent trend towards fixed price transactions due to the great scope for time-consuming disputes in relation to the preparation of completion accounts, but earn-outs and completion accounts are typically more attractive options due to obtaining upto-date and accurate information.

Parties agree a price for the target company which is fixed before SPA is signed.



Tends to be more attractive to S to receive a fixed price for the company.

1. Risky for B whose only opportunity for a price adjustment after completion is by bringing a valid warranty claim.

2. May be longer negotiations which may not result in any final agreement (e.g. on the valuation of the company).

3. S may attempt to extract value from the company between the date of the agreed accounts and the completion date ('leakage') such as through dividends or inappropriate payment of expenses.

4. But this can be guarded against by obliging S to undertake to repay such leakage to B on a pound for pound basis.

1. Earn-out What is an earn-out?
 Part of the consideration will be based on the profit earned over a specific period of time post-completion. An initial payment will be made on completion and then following payments will be made depending on the profits earned during that period.

For example...
 B values the company at £10m based on its past performance.
 S values the company at £15m based on projections of the company's future profit.
 If they can't agree on the fixed value of the company, they could agree that B pays the initial £10m, and then the remaining £5m if S's valuation proves true

These are most often used where S continues to manage the company postacquisition.

within a certain amount of years.

Is an earn-out applicable on the facts?

1. Is there a concern about the level of profit in the target company? if so, an earn-out will address this concern.

2. Is there a dispute about the potential level of profit/valuation of the target company?

3. Are there any suggestions that the profit will keep climbing at a particular rate?

4. Are sellers remaining involved in the company?
(i) company selling? very unlikely to continue to be involved (unlike, for example, individuals selling shares in a family business) (ii) wants to do other projects/things?

5. Are there other concerns which an earn-out won't address?


1. B pays exactly what the company is worth and avoids overpaying if the company doesn't live up to expectations

1. Conflict between short-term growth (which benefits S who will be looking to maximise profit) and long-term growth (which benefits B).

2. Motivates S/manager of Business to maximise the profit of the company, particularly if that person is likely to stay on and continue to play some role in running Business.

2. Possibility that B could acquire the target and sell it to a third party. If B did that, then the profit won't meet S's projections and will affect how much consideration they will receive. Restrictions can be put in place to prevent this - Sellers remain involved and spot if B does something against spirit of the agreement.

3. Completion Accounts What are completion accounts?

When negotiating, parties may have based their valuation on dated information (such as the last audited accounts). B will want confirmation that the figures have not altered significantly since the date of original accounts.

Are completion accounts applicable on the facts?

1. Is there a concern/disagreement about the method of valuation of an asset (e.g. stock valuations, depreciation, bad/doubtful debts)?

2. Is the valuation based on management accounts (whose purpose is not the valuation of the company for sale as a going concern) or out-of-date audited annual accounts?

3. If so, then completion accounts will give an accurate and upto-date valuation of the assets on completion date, determine the method of valuation, and impose time limits (e.g. end of season stock will be depreciated more than new season stock for a retailer) Profit levels

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