Disclosure Schedules & Mergers and Acquisitions Transactions – How Earn-Outs Can Go Wrong

January 18, 2023

Mergers and acquisitions (M&A) are complex transactions that involve the combination of two or more companies, or the transfer of one company’s assets and liabilities to another. Disclosure schedules are an essential component of M&A transactions, as they provide a means for buyers and sellers to disclose information relevant to the transaction. These schedules are often used to allocate risk, and one of the most common forms of risk allocation is through the use of earn-outs. However, earn-outs can be difficult to structure and manage, and can go wrong if not properly managed. In this article, we discuss the role of disclosure schedules in M&A transactions, the types of earn-outs and how they can go wrong.

The Role of Disclosure Schedules in Mergers and Acquisitions Transactions

Disclosure schedules are essential components of M&A transactions, including international acquisitions, as they allow buyers and sellers to disclose information relevant to the transaction. The key elements of a disclosure schedule include the buyer’s and seller’s representations and warranties, indemnification provisions, and details of the earn-outs. Representations and warranties provide assurance that the buyer and seller are in compliance with the terms of the agreement, while indemnification provisions protect the buyer from any liability should the seller fail to comply.

The disclosure schedule also allows the parties to allocate risk and rewards through the use of earn-outs. An earn-out is a contractual arrangement whereby the buyer and seller agree that the buyer will pay an additional sum of money if the acquisition meets certain performance targets. Earn-outs are often used when the parties cannot agree on a price, or if the seller is reluctant to accept a lump sum payment.

Types of Earn-Outs

There are several types of earn-outs that can be used in M&A transactions. The most common types of earn-outs are performance-based earn-outs, milestone earn-outs, and equity-based earn-outs.

Performance-based earn-outs are based on the performance of the acquired company over a certain period of time. The buyer agrees to pay the seller an additional sum of money if the company meets certain performance targets, such as a certain level of revenue or profitability.

Milestone earn-outs are based on the achievement of specific goals or milestones. The buyer agrees to pay the seller an additional sum of money if the company achieves certain milestones, such as the launch of a new product or the completion of a project.

Equity-based earn-outs are based on the future value of the company’s equity. The buyer agrees to pay the seller an additional sum of money if the company’s equity reaches a certain value.

How Earn-Outs Can Go Wrong

Earn-outs can be difficult to structure and manage, and can go wrong if not properly managed. One of the most common problems with earn-outs is that the buyer and seller disagree on the performance targets or milestones. This can lead to disputes over the payment of the earn-out, as the buyer may not agree that the targets or milestones have been met.

In addition, earn-outs can be difficult to value and there is often a lack of clarity as to what constitutes a successful outcome. This can lead to disputes over the payment of the earn-out, as the buyer and seller may disagree on the value of the business or the performance targets.

Finally, earn-outs can be difficult to monitor and manage. This can lead to disputes over the payment of the earn-out, as the buyer may not be able to adequately monitor or evaluate the performance of the business.

Selling a Business During Lawsuit – Role of M&A

In addition to the challenges associated with earn-outs, there are also challenges associated with selling a business during a lawsuit. When a business is involved in a lawsuit, the buyer and seller must carefully consider the potential risks and rewards of the transaction. The buyer must be aware of the potential costs associated with the lawsuit, and should consider engaging the services of an experienced M&A lawyer to help assess the risks and rewards. The seller should also consider engaging the services of an experienced M&A lawyer to help ensure that the sale of the business is properly structured and documented.

Can You Sell Part of a Business?

Yes, it is possible to sell part of a business. This is known as a partial sale or partial divestiture. Partial sales can be used to raise capital, to exit a particular market, or to restructure the business. When considering a partial sale, the buyer and seller should consider all aspects of the transaction and carefully consider the potential risks and rewards. The buyer should also ensure that the partial sale does not conflict with any existing contracts or agreements. A qualified M&A lawyer should be consulted to ensure that the partial sale is properly structured and documented.

Selling Out a Business Discreetly

When selling out a business, it is important to be discreet and to protect the confidentiality of the transaction. This can be done through the use of a nondisclosure agreement, which should be signed by both the buyer and seller prior to any discussions about the sale. The buyer should also ensure that the sale is kept confidential and should use appropriate measures to protect the information. In addition, the buyer and seller should use encrypted emails and secure file sharing services to ensure that confidential information is not leaked.

Evaluation of the Cost and Business Value

When evaluating the cost and business value of an acquisition, the buyer should consider the current and projected revenue, expenses and profits of the business. The buyer should also consider the potential synergies between the two businesses, the impact of the transaction on the target company, and the potential risks and rewards of the transaction. The buyer should also consider the potential tax implications of the transaction and should engage the services of a qualified tax advisor to ensure that the transaction is structured in the most tax-efficient manner. Finally, the buyer should consider the cost of due diligence and the cost of financing the transaction.

Conclusion

Mergers and acquisitions transactions involve complex issues that require careful consideration. Disclosure schedules are an essential component of M&A transactions, as they provide a means for buyers and sellers to disclose information relevant to the transaction. Earn-outs are a common form of risk allocation and can be difficult to structure and manage, and can go wrong if not properly managed. Finally, selling a business during a lawsuit can be complicated, and both the buyer and seller should consider engaging the services of an experienced M&A lawyer to help assess the risks and rewards.