How Enforcement Quality Affects the Use of M&A Earnouts

In mergers and acquisitions (M&A), one of the trickiest tasks is assessing the value of the company to be purchased or sold. While in some cases buyers and sellers come easily to an agreement, in others the information asymmetry between the two parties is too great or the target company is too opaque, and the deal can fall apart.

Earnouts are contractual agreements that link part of the acquisition price to the future performance of the target. One portion of the price is paid to the selling shareholders up front and the remaining portion is paid only if the target … Read more