When negotiating an M&A transaction, often the buyer and seller bridge the gap in negotiations over the acquisition price by establishing an earn-out to enable the seller to reap greater rewards if as the seller’s products and services grow under the buyer’s new ownership. However, after closing, it can be very challenging for the seller to gain insight into the acquired business and asset progress toward achievement of earn-out objectives and milestones. To address this, sellers are increasingly negotiating post-closing information rights.
We have analyzed data from over 500 transactions where Fortis Advisors has served as shareholder representative, as captured in our Forsite™ M&A Deal Tool. While 80% of all deals with earn-outs include some form of information rights for the seller, generally those rights are limited to annual written statements—only 26% of deals require more frequent reports, and 30% of deals provide for in-person meetings to review progress toward achievement of contingent payments.
In order to enable the selling securityholders to monitor and, where possible, maximize return on earn-outs, the seller should negotiate rights for the shareholder representative to (1) receive meaningful periodic (ideally no less than bi-annual) reports of progress toward achievement of contingent payment, and (2) if possible, require periodic in-person meetings to discuss the progress. Finally, the shareholder representative should have rights to review buyer records reasonably sufficient to calculate the metrics upon which the contingent payment is based.