In today’s cautious economic climate, deals involving earn outs – which are deferred payments made on achieving financial goals - are becoming increasingly common.
It allows a business to pay less up front on a deal – perhaps for new premises or new equipment – and make further payments once they have reached agreed targets.
Commentators have said up to 25 per cent of deals now include some sort of earn out provision. But do they lead to disputes later on?
Alistair Gregory, associate solicitor at Stephensons Solicitors LLP, acts for businesses in all areas of commercial disputes, including earn out litigation. He says: “Cash flow can be tight for many businesses large and small in the present time, when lending is restricted and businesses are taking longer to settle their bills. This squeeze on available cash can lead to businesses utilising earn out options to spread the cost of a deal and make their initial up front consideration much smaller.
“However many earn out deals can lead to disputes, for example in terms of breaches to agreed terms, or perhaps the structure of the company changes post deal, which then causes problems. Careful consideration should be given to the drafting of the agreement.”
Alistair suggests defining specific situations within the agreement to avoid disputes. This includes a consideration for how the earn out profit is to be calculated; what accounting policies are to be used in the calculation; how post-deal change to the business should be handled.
Alistair said: “This is not an exhaustive list, but includes typical considerations when planning to include an earn out option in any deal. Not all earn out disputes can indeed be foreseen, but by planning ahead businesses can minimise their risk of a costly commercial dispute.”
ENDS
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Media information: Lianne Tracey
Stephensons Solicitors LLP
T: 01616 966 229
E: lianne.tracey@stephensons.co.uk