Earn-out calculator

Part of the purchase price paid after closing only if the business reaches agreed targets, usually revenue or EBITDA, over a set period. It bridges a difference between what the seller expects and what the buyer will pay for certain. Earn-outs

An earn-out is paid later and depends on results under the buyer’s management. Discounting each payment for time and risk gives the amount it is worth at closing, which is the fair comparison with an offer paid in cash.

The purchase agreement: a precise definition of the metric and how it is measured, covenants on how the business is run, access to the records, and acceleration of the payment if the buyer sells the business or breaches the agreement.

Where the conditions in the CRA’s Interpretation Bulletin IT-426R are met, the seller may use the cost recovery method. Each payment first reduces the cost base of the shares, and amounts above it are capital gains in the year they become determinable. The conditions include an arm’s length buyer, an earn-out tied to goodwill whose value cannot reasonably be agreed at closing, and an earn-out that ends within five years after the end of the company’s tax year of the sale. Gains on qualifying shares remain eligible for the lifetime capital gains exemption.