According to Generally Accepted Accounting Principles (GAAP), when a company acquires a business, the consideration paid, assets acquired, and liabilities assumed are recorded at their fair values. The consideration paid not only includes the actual cash paid or debt incurred, but any contingent consideration payments or receipts (earn-outs) that are part of the purchase agreement. Contingent earn-outs are often structured as a multiple of a measureable performance benchmark. For example, if the acquired company makes more than $1,000,000 in sales, we will pay you 1% of the sales above $1,000,000. As the name implies, payments under these agreements are contingent upon the acquired business meeting or exceeding a pre-determined benchmark.
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