When we are negotiating a shareholding sale transaction the price is, obviously, the main topic. On the seller’s side, the expectation of receiving the best valuation for the business developed is always high, and is often not aligned with the buyer, resulting in complex negotiations.
As a way to overcome this issue and equalize these expectations, it is possible to include a remuneration mechanism through an earn-out clause, in which the parties establish certain goals that, if achieved after closing the deal, will result in the sellers receiving a portion extra price.
As an example, we highlight 5 key points to watch out:
1. Objectively establish the relevant event: at this point, buyer and seller must make it clear what the trigger will be that will justify payment. Will it be achieving a certain growth target? Capturing a specific customer? Keeping salespeople in the business for a certain period of time after closing? There are many issues, and they need to be addressed from the beginning of the clause negotiation.
2. Company Management: this is perhaps one of the most relevant points to be observed. The management of the company, the way in which business will be conducted and, mainly, who will carry out this management is usually one of the points of greatest future dispute when sellers remain in the operation, and therefore deserves special attention in negotiation.
3. Clear metrics for determining the achievement of goals: In cases where the event is related to subjective data, the next step is to reflect in the clause how the evaluation or calculation of achievement will be carried out, including through the creation of formulas, avoiding any room for an interpretation that takes away the buyer’s right to receive the extra installment.
4. Form of remuneration: many earn-out clauses include other forms of remuneration for sellers, and the price portion may be represented, for example, by receiving equity participation in another business from the buyer.
5. How will the participation in another company be constituted: in cases where remuneration does not occur through monetary payment, it is important to establish what the terms and conditions will be for receiving the installment. In the example given in item 3, in which participation in another business is granted, issues such as partners’ agreements, non compete and non solicitation will also need to be negotiated in the earn-out clause, thus preventing the seller from ending up exposed in other businesses. or, even more serious, there is some impediment to receiving this portion of the shareholding.
Given the relevance of the topic for the closing of an M&A, it is essential that some care is taken when constructing this clause, which must be structured in a personalized way for each sales process, thus avoiding future discussions that could have a direct impact on the price of the deal.
