Corporate Growth & Ventures Series: Earn-Out and Reverse Earn-Out Provisions

In private middle-market mergers and acquisitions (“M&A”) transactions, earn-out clauses within purchase agreements or earn-out agreements are often used to facilitate the sale of a business when the vendor and the purchaser wish to close the valuation gap of the target on closing. While earn-outs are a common mechanism within M&A transactions, tax considerations are causing reverse earn-outs to become increasingly prevalent in Canada in favour of conventional earn-out clauses.

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