Tax Effect of Earn Out on Share or Asset Sale
An earn out is an adjustment to the purchase price in the purchase and sale of a business either by way of assets or shares. The purchase price is adjusted upwards if certain targets are met in the years after the sale. An earn out can also be structured as a reverse earn out where the earn out component of the purchase price is set and then reduced if targets are not met. There are significant differences to the vendor between the tax treatment of a regular earn out and a reverse earn out. Generally a vendor will tax plan to use a reverse earn out which has a better tax effect than a regular earn out.
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