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Earn-Outs Are Key in FASB's Revisions for M&A Treatment: Accounting Rules Maker Proposes Changes That Could Cut Earnings, Stir Volatility.

Article Excerpt
Sometimes a deal-saver, sometimes a flashpoint for hard feelings, the earn-out invariably is embraced by dealmakers only with trepidation. In theory, it's an elegantly simple way to rescue a deal stalled by a seemingly unbridgeable gap in the seller's asking price and the buyer's bid. Mix in people, however, and the theory can go astray. So many earn-out agreements based on post-deal performance of the target company have wound up in litigation or arbitration that many dealmakers historically have considered attaching them to a deal structure only as a last resort.

Nevertheless, the present m&a market - characterized by an enormous chasm in price perceptions between the buy and sell sides - has sparked a burst of popularity for the earn-out as a technique for getting transactions done, even among dealmakers aware of its potential for friction. But that newfound acceptance is being threatened by a proposal to change the way an acquirer must account for the earn-out. It is not only more complicated, says Jeff Kotowitz, a transaction services partner at...

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