Earnout Mechanism

The contractual framework in an M&A transaction that determines how the final purchase price is calculated and adjusted to reflect the financial position of the target at closing. The two principal mechanisms are completion accounts (which adjust the price post-closing based on actual financial metrics at the completion date) and locked box (which fixes the price based on a historical balance sheet date with no post-closing adjustment).

A contractual arrangement in which one party agrees not to engage in competitive activity for a specified period and within a defined geographic area. Non-compete agreements are recognised as identifiable intangible assets in purchase price allocations and serve to protect acquired customer relationships, trade secrets, and human capital.

The agreed level of working capital that the target business should have at the completion of an M&A transaction, established during negotiations and used as a benchmark for purchase price adjustments under a completion accounts mechanism. The target is typically set at the average net working capital over a 12-month trailing period, normalised for seasonality and non-recurring items.

A mechanism used in M&A transactions where the final purchase price is adjusted after closing based on the target company's actual financial position — typically net assets, working capital, debt, and cash — as at the completion date. Completion accounts are prepared post-closing and compared against agreed targets, with adjustments settling the difference between estimated and actual values.

A common M&A pricing convention in which the enterprise value is expressed before accounting for the target's cash balances and debt obligations, which are then adjusted at completion to calculate the equity value payable to the seller. Under this convention, equity value equals enterprise value plus cash and cash equivalents less financial debt (including debt-like items such as pension deficits, deferred consideration, and unpaid tax).

A contractual provision in acquisition agreements that allows the buyer to withdraw from or renegotiate a transaction if the target company experiences a significant negative event between signing and closing. MAC clauses define what constitutes a material change and typically exclude general market downturns, industry-wide conditions, and changes in law, focusing instead on company-specific deterioration.

A legal concept in M&A agreements defining a significant deterioration in the target company's business, operations, financial condition, or prospects that may give the buyer the right to terminate the transaction or renegotiate the purchase price before completion. MAE definitions are among the most heavily negotiated provisions in sale and purchase agreements, with carve-outs typically excluding general market conditions, industry-wide changes, and events resulting from the announcement of the transaction itself.

Statements of fact and assurances made by the seller (and sometimes the buyer) in an M&A sale and purchase agreement regarding the condition, operations, finances, and legal standing of the target business. Warranties cover areas including financial statements, material contracts, intellectual property ownership, litigation, tax compliance, and employee matters.

Contingent Liability

A potential obligation arising from past events whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the entity's control, or a present obligation where payment is not probable or the amount cannot be reliably measured.

What is an earnout and why do acquirers use them?

An earnout is contingent consideration in M&A where the seller receives additional payments if the acquired company hits post-close performance milestones (revenue, EBITDA, retention).

How is contingent consideration treated in a purchase price allocation?

Contingent consideration (earnouts) is measured at fair value on the acquisition date and included in the total purchase price. Changes in fair value post-acquisition are recognised in profit or loss.

What are earnouts and how do they affect deal pricing?

Earnouts are contingent payments in M&A: the seller receives additional payment if the acquired company hits post-acquisition targets (revenue, profit, retention).