Earn-outs to bridge gap between negotiation parties – curse or blessing?

Christian Toll () and Jan-Phillipp Rolinck ()
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Christian Toll: Fern-Universität in Hagen, Chair of Business Administration, esp. Investment Theory and Business Valuation
Jan-Phillipp Rolinck: Fern-Universität in Hagen, Chair of Business Administration, esp. Investment Theory and Business Valuation

Managerial Economics, 2017, vol. 18, issue 1, 103-116

Abstract: An agreement upon the terms of company transactions is aggravated by the existence of different information levels concerning the negotiation parties; this can be seen as a basic cause for divergent price expectations. Hence, the question is how the existing differences in price expectations of the transaction parties can be handled to reach a consensus, even when there is no area of agreement in the initial round of negotiations. Earn-outs are an interesting approach in overcoming divergent price expectations by making the purchase price dependent on the future performance of the company. However, formulating and implementing earn-outs may have a substantial potential for conflict. The present contribution shows which advantages and disadvantages the transaction parties face if an agreement regarding earn-outs is made.

Keywords: mergers and acquisition; asymmetric information problem; earn-out (search for similar items in EconPapers)
Date: 2017
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