Do Earn-Outs Always Apply to All Shareholders?

When selling a business, one of the most common questions we hear from shareholders is whether an earn-out has to apply equally to everyone. This is especially relevant where some shareholders are passive investors and others are actively involved in running the company.

What Is an Earn-Out?

An earn-out is a mechanism used by buyers to defer part of the purchase price until after completion. Payment is typically linked to future financial performance, usually profits. This gives the buyer protection if the business underperforms and provides an incentive for operational shareholders to stay engaged and focused on delivering results.

Do Earn-Outs Have to Apply to All Shareholders?

From a tax perspective, care must be taken to avoid creating differential pricing. If different shareholders are seen to be selling at different effective prices, this can cause tax complications and may attract scrutiny from HMRC.

For this reason, earn-outs are often applied to all shareholders in the same way. However, this is not the only option.

Alternative Structures

There are ways to adapt deal structures where only some shareholders are central to the ongoing performance of the business.

One common solution is to use a put and call option over a portion of shares owned by the key individual. This option requires the shares to be bought in the future, usually two or three years post-completion, based on an agreed valuation mechanism.

This has the same commercial effect as an earn-out, but it allows the structure to be carefully tailored to the needs of the shareholder group while avoiding tax pitfalls.

Key Takeaway

Earn-outs are an effective tool for buyers and a common feature in healthcare M&A transactions. They do not always need to apply in exactly the same way to every shareholder, but careful structuring and tax planning are essential.

At Eclipse Corporate Finance, we specialise in advising healthcare business owners and management teams on how to structure deals that protect value while meeting shareholder objectives.