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How to Buy or Sell a Private Company
Buying Distressed Companies
Planning an Exit Strategy
Methods of Valuing a Business
Capital Gains Tax Changes 2008
Grooming Your Business For Sale
Buying Insolvent Businesses
Tax Implications of
Earn-outs
How to Approach Business Sellers
Evaluating a Target Company
Essential Due Diligence Questions
Raising Finance for an Acquisition
Acquisition Strategies
Obtaining MBI Finance
Post Purchase/Merger Integration
Company Exit Multiples
Negotiating Techniques

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:

  • A right to receive loan notes (issued by the purchaser) after a certain period has elapsed and dependent on the performance of the newly taken-over business. The loan notes would be redeemable after a certain period or periods.
  • A right to receive securities in the purchaser or its parent company after a certain period has elapsed and dependent on the performance of the newly taken-over business. These may or may not have restrictions placed on them.
  • Restricted (forfeitable) securities (shares or loan notes) issued by the purchaser and which vest after certain performance targets have been reached.
  • Convertible securities, issued by the purchaser and which convert into a more valuable security after certain performance targets have been reached.

As well as representing "further consideration", an attraction of earnouts is that they allow for...

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Other areas covered:

Inland Revenue guidance

How to structure and earnout to avoid tax

Share transactions

 


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