M&A Boot Camp booklet 2023 - Flipbook - Page 38
L.
VI.
General or “miscellaneous” provisions
PRICING ISSUES IN BUSINESS ACQUISITIONS
A.
B.
Dollar amount of purchase price – various possible formulations
1.
Fixed dollar amount
2.
Fixed dollar amount, subject to adjustment after the closing based on a
post-closing audit of the target company’s closing date financial
statements – e.g., “$50,000,000 plus or minus the amount by which the
stockholders’ equity of the target company as of the closing date is greater
or less than $35,000,000”; sometimes, working capital-based adjustments
or other adjustments are used
3.
“Earn out” formula – e.g., $20,000,000 plus an “earn out” equal to 20% of
the amount by which the pre-tax income of the acquired business exceeds
$4,000,000 during the 12-month period following the closing; “earn outs”
involve difficult drafting issues and often result in disputes
4.
Other possible formulations
Form of consideration
1.
Cash payment at closing
2.
Deferred cash payments or promissory notes
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a.
Timing of payments
b.
Interest rate
c.
“Set off” rights – ability of the acquirer to deduct indemnification
payments or other amounts owing to the acquirer from amounts
payable by the acquirer
d.
Security for future payments; escrow of future payments
e.
Possible availability of installment tax treatment to recipients of
payments
f.
Deferred payment rights and promissory notes (as well as interests
in an escrow fund) may constitute “securities” under federal and
state securities laws
g.
Subordination of the acquirer’s deferred payment obligations to
obligations to other creditors of the acquirer
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