An earn-out helps protect the buyer from any hidden problems such as client concentration, as well as allows the seller a higher price than they would otherwise if the buyer paid the entire purchase price up front. Typically, the seller collects a smaller sum at the close, and then has the opportunity to earn more based on the company’s forward progress.

A divestiture is defined as the eradication of a portion of a company in order to bolster other areas of profitability, to prevent bankruptcy, or otherwise dispose of an asset(s) that is underperforming.

In a typical M&A deal, the business buyer will perform due diligence in order to fully gain knowledge of the inner workings of the target company. The due diligence process allows the buyer to confirm financial statements, unearth possible liabilities, and determine an appropriate purchase price for the business.