When negotiating the sale of a business, contingent consideration provisions are oftentimes incorporated as a component of the total purchase price to close the disparity between the buyer’s and the seller’s expectations regarding the target company value. Additionally, contingent consideration provisions allow buyers and sellers to: (1) defer a portion of the purchase consideration to a later date, (2) incentivize and motivate sellers post-transaction, (3) provide a mechanism to allocate a portion of a transaction’s risk and reward from the buyer back to the seller, and (4) offset a portion of the buyers’ (equity and debt) capital needed at closing. Buyers may be more willing to pay a higher total price for a business if the seller is willing to make a portion of the value contingent on the target company’s ability to achieve certain milestones post-acquisition. At the same time, the seller may be more willing to accept a lower base price if they are confident that the company can achieve certain performance goals, thereby realizing the contingent consideration and higher total price.
Dan Callanan is a Managing Director at Prairie Capital Advisors, Inc. He can be contacted at 614.768.7301 or by email: email@example.com.
Rebecca McElwain is Director at Prairie Capital Advisors, Inc. She can be contacted at 614.768.7302 or by email: firstname.lastname@example.org