Tax Treatment of Earnouts in M&A Transactions: Navigating Key Tax and Accounting Implications for Buyers and Sellers

M&A transactions routinely include earnout provisions as a valuation-bridging mechanism to alleviate concerns by both parties about tendering or receiving a fair purchase price. However, attorneys and tax professionals must recognize the tax implications of earnouts in M&A transactions and plan accordingly when negotiating and structuring earnouts.

Earnouts can allow either an upward price adjustment post-closing--when sufficient value is created to justify a higher purchase amount--or innovative financing for an originally agreed upon price. Further, earnouts can deter disagreements during the negotiation of the deal price only to result in post-closing disputes over the earnout itself.

A sale of a privately held company involving an earnout raises a number of tax challenges, such as the tax treatment and calculation of gain each year, the classification of earnout payments for income tax purposes, and other critical tax considerations for earnouts in M&A transactions.

Listen as our panel discusses key provisions when structuring earnouts, the tax and accounting issues for all parties involved, and best practices to ensure tax compliance while also achieving the intended benefits for buyers and sellers.

1. Earnouts in M&A transactions
2. Tax considerations with earnouts and other deferred payments
   1. Ordinary income vs. capital gains
   2. Determining proper tax treatment
   3. Timing of the tax to seller
   4. Imputed interest
3. Best practices for drafting tax provisions in the deal documents

The panel will discuss these and other key issues:

• Advantages and disadvantages of earnouts in M&A transactions
• Critical factors in determining the proper tax treatment of earnouts and other deferred payments
• Key tax considerations in structuring earnouts and other deferred payments in connection with an M&A deal

Learning Objectives

After completing this course, you will be able to:

• Determine the advantages and disadvantages of business purchases subject to earnout provisions in the deal
• Identify tax indemnification provisions relevant to the transaction structure
• Distinguish between the interests of buyers and sellers in structuring earnouts
• Recognize key factors for determining the proper tax treatment of earnouts in M&A transactions

• Field of Study: Taxes
• Level of Knowledge: Intermediate
• Advance Preparation: None
• Teaching Method: Seminar/Lecture
• Delivery Method: Group-Internet (via computer)
• Attendance Monitoring Method: Attendance is monitored electronically via a participant's PIN and through a series of attendance verification prompts displayed throughout the program
• Prerequisite:

  Three years+ business or professional firm experience at mid-level within the organization, preparing complex tax structures for businesses; supervisory authority over other professionals. Knowledge and understanding of business structures, purchase price allocation, tax indemnification provisions. Familiarity with basic concepts related to assets and stock sales.

Strafford Publications, Inc. is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of Accountancy have final authority on the acceptance of individual courses for CPE Credits. Complaints regarding registered sponsons may be submitted to NASBA through its website: www.nasbaregistry.org.

IRS Approved Provider

Strafford is an IRS-approved continuing education provider offering certified courses for Enrolled Agents (EA) and Tax Return Preparers (RTRP).