Tom Klouda and Daniel Andreca explain the tax considerations of earn-out structures
Without appropriate planning, it is well known that earn-outs can make the negotiation of a deal more challenging, especially when compared with a no earn-out deal. The main difficulties centre around the potential tax issues and a poorly designed earn-out structure which can result in neither side obtaining the commercial benefits they desire.
Definition of an earn-out
Depending upon the terms of the share purchase agreement (SPA), the proceeds payable on the acquisition of a business could be paid entirely at the deal competition date, with the alternative being for only a proportion of the total consideration to be paid at the completion date, with the remaining balance remaining to be paid at a later date.