USA Law and Practice Contributed by: Vijay Sekhon, Brien Wassner, John Godfrey and Justin Macke, Sidley Austin LLP
Earn-Outs Earn-outs are used selectively in the United States, typically in growth or founder-led companies where future performance is uncertain. A portion of the pur - chase price is paid contingent on meeting financial or commercial milestones (eg, EBITDA targets, product launches or regulatory approvals). While earn-outs can bridge valuation gaps, they can give rise to post- closing disputes. Accordingly, they are carefully struc - tured with defined metrics, reporting mechanics and covenants around operational conduct. Rollover Equity Rollover equity is common in US private equity trans - actions involving founder-led or management-heavy businesses. Management sellers often retain a minor - ity interest in the go-forward structure, usually on the same economic terms as the sponsor. This structure aligns incentives and supports continuity. The rollover is typically implemented via a tax-free transaction and Private equity sellers generally prefer fixed price deals to avoid post-closing adjustments and escrow delays, but limited purchase price adjustments and related escrows are common in United States private company transactions. Earn-outs are generally dis - favoured given their fund wind-down timelines and capital return mandates. Private equity buyers tend to follow market norms for limited purchase price adjustments in bilateral United States deals and are willing to accept a locked-box when mandated in auc - tions. Where locked-box is used, private equity buyers seek leakage protection and strong representations on account accuracy. 6.2 Locked-Box Consideration Structures is not taxable until a subsequent exit. Sponsor-Specific Considerations Where locked-box pricing is used, most US deals do not include a “ticking fee” but some do so calculated on an annualised basis (eg, 3% to 5%) accruing from the locked-box date to closing. This compensates the seller for carrying the economic risk of the busi - ness during the interim period. Leakage provisions are standard where there is locked-box pricing. The seller typically covenants not to extract value from the busi - ness post locked-box date, except for agreed items (eg, salary, permitted dividends). If unpermitted leak -
ernance rights, though larger LPs may negotiate for observer rights and/or information access. External and Strategic Co-Investors In some cases, sponsors bring in external inves - tors (eg, family offices, other funds, corporates) for additional capital or domain expertise. Strategic co- investors are more common in energy, infrastructure or healthcare transactions. Their participation often comes with bespoke rights, such as put/call options or board representation. 6. Terms of Acquisition Documentation 6.1 Types of Consideration Mechanism US private equity transactions commonly use pur - chase price adjustments for private transactions but a fixed price per share is almost universal for acquisi - tions of public companies. Purchase Price Adjustments Purchase price adjustments remain the default across the board in the United States private company trans - actions. These limited adjustments typically account for actual cash, debt and working capital levels as of closing and are often supported by a limited escrow. The buyer pays an estimated price at signing, followed by a true-up once the final balance sheet is agreed. This ensures the buyer receives a company with a nor - malised working capital position and no unexpected debt. Locked-Box Pricing Locked-box mechanisms are not common in the Unit - ed States but seen on occasion in larger, competitive processes, particularly PE-to-PE or sponsor-led exits, where deal certainty and minimal post-closing dis - putes are prioritised and/or there is a significant Euro - pean presence. Pricing is fixed off a historic balance sheet date, and the seller covenants not to extract value (“leakage”) between that date and closing. In some cases, a “ticking fee” or interest-like accrual is negotiated to compensate the seller for the period between locked-box date and closing.
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