One of the merits is a contractual clause stipulating that in the future, the seller of a business will receive additional compensation if the company achieves certain financial objectives, usually expressed as a percentage of turnover or gross profit. If a contractor who wants to sell a business demands a price that requires more than a buyer is willing to pay, a provision for the salary can be used. In a simplified example, there could be a purchase price of $1,000,000 plus 5% of gross sales over the next three years. Beyond cash compensation, there are a number of important considerations. This includes determining the decisive members of the organization and whether or not to extend a merit to them. The duration of the contract and the role of management of the company after the acquisition are two issues that also need to be negotiated. Keywords: salary, occasional payments, acquisitions We empirically study acquisition contracts that provide for contingency payments in acquisition contracts. Our analysis shows a significant heterogeneity in the potential size of the salary, the performance ratio on which the conditional payment is based, the period during which the benefit is measured, the form of payment for the salary and the overall sensitivity of the summanan payment to the target benefit. Our tests of the determinants of contractual conditions support the view that revenues are structured to minimize the cost of valuation uncertainty and moral hazard in acquisition negotiations. .
Related Works:This item may be available elsewhere in EconPapers: Searching for items with the same title. Subscribe to this expense book for other articles on management performance, Tobin`s Q, and the Gains from Successful Tender Offers Katz Graduate School of BusinessPittsburgh, PA 15260United States412-648-1708 (Phone) Downloads: (external link) www.sciencedirect.com/science/article/pii/S0165-4101 (10)00025-X Only full text for ScienceDirect subscribers. IO: Corporate Structure, Purpose, Organization – eJournal Contract We welcome helpful comments from an anonymous referee, James Ang, Mara Faccio, Laura Frieder, Sattar Mansi, Ron Masulis, John McConnell, Wayne Mikkelson, Bob Nabholz, Micah Officer, Raghu Rau, Avri Ravid, Jerry Zimmerman (editor), participants in the law and business workshop at Vanderbilt University, attending western finance association meetings in Keystone, Colorado, and attending Drexel University, George Mason University, Purdue University, the University of Delaware, the University of Notre Dame and the University of Notre Dame. The document also benefited from useful discussions with William Strong (CEO, Morgan Stanley) and Moshe Kupietzky (Management Partner, Sidley Austin). Finally, we thank Rahsan Bozkurt and Mayank Kanodia for their excellent support for research. ABC Company has revenues of $500 million and a profit of $50 million. A potential buyer is willing to pay $250 million, but the current owner believes this underestimates future growth prospects and is asking for $500 million.