Tax Implications of Earnouts

Tax Implications of Earnouts

When planning the sale of a business, the tax implications should never be overlooked. With careful planning and advice, maximum value can be extracted from the sale. Often, however, hard-earned gains unnecessarily slip through the vendor's fingers into the coffers of the Inland Revenue.

For anyone not familiar with the term, an 'earnout' will often occur when a business is sold and there is difficulty in agreeing a value fair to both vendor and purchaser. In such circumstances, an earn-out represents further consideration for the purchase of the business. Typically, the vendor will receive a cash sum, or an initial issue of securities, plus an earnout consisting of one of the following: