Earn-outs to bridge gap between negotiation parties – curse or blessing? Cover Image

Earn-outs to bridge gap between negotiation parties – curse or blessing?
Earn-outs to bridge gap between negotiation parties – curse or blessing?

Author(s): Christian Toll, Jan-Philipp Rolinck
Subject(s): Economy, Business Economy / Management, Financial Markets
Published by: Exeley Inc.
Keywords: mergers and acquisition; asymmetric information problem; earn-out;

Summary/Abstract: An agreement upon the terms of company transactions is aggravated by the existence of different information levels concerning the negotiation parties; this can be seen as a basic cause for divergent price expectations. Hence, the question is how the existing differences in price expectations of the transaction parties can be handled to reach a consensus, even when there is no area of agreement in the initial round of negotiations. Earn-outs are an interesting approach in overcoming divergent price expectations by making the purchase price dependent on the future performance of the company. However, formulating and implementing earn-outs may have a substantial potential for conflict. The present contribution shows which advantages and disadvantages the transaction parties face if an agreement regarding earn-outs is made.

  • Issue Year: 18/2017
  • Issue No: 1
  • Page Range: 103-116
  • Page Count: 14
  • Language: English