How To Account For Earnouts In Financing Agreements

Law360, New York (July 8, 2014, 10:51 AM EDT) -- An earnout, also known as “contingent consideration”[1] in accounting parlance, is a contractual provision in an acquisition agreement that adds a variable component to the purchase price for an acquisition. Earnouts allow a purchaser to pay a portion of the purchase price to a seller on a contingent basis if and to the extent the target business reaches certain milestones after the closing. Often these milestones are financial in nature (achieving, for example, revenue, net income or EBITDA benchmarks or reaching a stock price target), but they can also be nonfinancial in nature (such as obtaining regulatory approval for a proposed...

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