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Earn-Out Clauses: A User's Guide

25 February 2009

International Law Office French M&A Newsletter

This update examines the increasing use of earn-out clauses in business acquisitions in France. The earn-out clause indexes a portion of the acquisition price to the future performance of the target company. Thus, the seller, which may assist the buyer in managing the company for a certain period after the sale, will benefit from an additional sale price if certain objectives conventionally agreed upon with the buyer are met. At first glance these clauses appear to be particularly appealing when the target company has a high potential for growth. Thus, it seems questionable whether such clauses are worthwhile in this period of financial crisis, when losses are more likely to occur than profits. However, earn-out clauses can also provide a means to facilitate share transfers in these times.

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