Various types of deferred payment plan

Under this method, the acquiring firm, besides making initial payment also undertakes to make additional payment in future years to the target firm in the event of the former is able to increase earnings consequent to merger. Since the future payment is linked to the firm’s earnings, this plan also known as earn-out plan. There are several advantages of adopting such plan to the acquiring firm:

• It emerges to be an appropriate outlet for adjusting the difference between the amount of shares the acquiring firm is willing to issue and the amount the target firm is agreeable to accept for the business

• In view of the facts that fewer number of shares will be issued at the time of acquisition, the acquiring firm will be able to report higher EPS (Earning per Share) immediately.

• There is built in cushion or protection to the acquiring firm as the total payment is not made at the time if acquisition. It is contingent to the realization of the potential projected earnings after merger.

Notwithstanding the above benefits, there are certain problems of deferred payment plan. The important one are:

• The target firm must be capable of being operated as an autonomous business entity so that its contribution to the total projects may be determined.

• There must be freedom of operation to the management of the newly acquired firm

• On the part of the management of the acquiring firm, there must be willing co-operation to work towards the success and growth of the target firm, realising that only by this way the two firms can gain from merger.

There are various types of deferred payment plan in vogue. The arrangement eventually agreed upon depends on the imagination of the management of the two firms involved. One of the often used plan for the purpose in base period earn out. under this plan the shareholders of the target firm are to receive additional shares for a specified number of future years.