What is Contingent Consideration? A Legal Overview
Definition & Meaning
Contingent consideration is a type of payment that depends on specific conditions being met. It is commonly used in acquisition agreements, where a buyer pays an initial amount at the time of purchase and agrees to pay additional sums later if certain criteria are fulfilled within a designated timeframe. This arrangement allows both parties to share the risks and rewards associated with the future performance of the acquired asset or business.
Legal Use & context
Contingent consideration is primarily utilized in the context of mergers and acquisitions. It is often included in earn-out agreements, which are contracts that specify additional payments based on the future performance of the acquired company. Legal professionals may draft these agreements to ensure clarity and enforceability. Users can manage related forms and documents through platforms like US Legal Forms, which provide templates for various legal needs.
Real-world examples
Here are a couple of examples of abatement:
Example 1: A tech company is acquired for $1 million, with an additional $500,000 contingent on the company achieving a revenue target of $2 million within the next two years. If the target is met, the buyer pays the extra amount.
Example 2: A pharmaceutical company agrees to purchase a startup for $5 million, with an additional $2 million payable if the startup's product receives FDA approval within three years (hypothetical example).