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

Author

Listed:
  • 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)

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.

Suggested Citation

  • Christian Toll & Jan-Phillipp Rolinck, 2017. "Earn-outs to bridge gap between negotiation parties – curse or blessing?," Managerial Economics, AGH University of Science and Technology, Faculty of Management, vol. 18(1), pages 103-116.
    • Handle: RePEc:agh:journl:v:18:y:2017:i:1:p:103-116
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    References listed on IDEAS

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