Executive Summary
Contingent consideration, often structured as earn-outs, helps buyers and sellers in M&A transactions navigate differing views on price. Under accounting rules, these arrangements must be measured at fair value on the acquisition date, with potential remeasurements in future periods. Analytical approaches vary depending on the payout structure, underlying metrics, and risk characteristics. Careful attention to structure, modeling approach, and documentation of key assumptions is essential for financial reporting.
Contingent consideration refers to payments in an acquisition that depend on future events or performance, often structured as earn-outs. Earn-out arrangements can help buyers and sellers overcome three interrelated potential sticking points in M&A transactions. First, earn-outs can be a mechanism for parties to share risk, whether it is related to company-specific or market-linked performance metrics or is more idiosyncratic in nature. Second, contingent consideration arrangements help align incentives and mitigate integration-related risks when sellers continue to be involved in the business after closing. Finally, earnouts can be useful in situations where buyers and sellers hold differing views of a company’s forward prospects. With the broader economic environment marked by elevated uncertainty, contingent consideration remains a practical tool to bridge differences of opinion regarding valuation. This article highlights recent observations and outlines considerations for the fair value measurement of contingent consideration.