Buying shares of a company is easy; buying the whole company is a negotiated process. Buyer and seller sign a confidentiality agreement, bids come in, the buyer checks the books in diligence, and a purchase agreement spells out who bears which risks. Then regulators approve and the deal closes. The price is often split into cash at closing and later payments that depend on results, called earn-outs. Their real value is the chance-weighted value in today’s money, not the headline number.
Why it matters: The headline price can be far from what the seller really receives.
Summary: An acquisition buys control of a whole company through a negotiated process: confidentiality, bids, diligence, a purchase agreement that allocates risk, then regulatory approval and closing. The price is often split between cash at closing and contingent payments such as earn-outs, whose real value is their probability-weighted present value.
- A control premium is paid because only control delivers the cash flows and the decisions (Part 1.8: Precedent Transaction Analysis).
- US deals above $133.9 million (2026) need a Hart-Scott-Rodino filing if the parties also pass the size-of-person test (automatic above $535.5 million) and usually a 30-day wait; tender offers stay open at least 20 business days.
- An earn-out paying $0, $40 million or $80 million in two years, with 50/30/20% odds, is worth $23.1 million today at 10%, not $80 million.
- Under ASC 805 an earn-out is remeasured every period through earnings, so success can produce a reported loss.
- Use earn-outs for forecast disputes, escrows and indemnities for specific risks.
When you buy a share on an exchange, you are buying a tiny, liquid, minority sliver of a company at whatever price the market happens to be quoting that second. An M&A transaction is a different animal entirely: one party is buying an entire company, or a controlling stake in one, in a privately negotiated deal that can take months to close and that fundamentally changes who controls the target’s strategy, management, and cash flows. Every valuation tool from Part 1: Corporate Finance & Valuation — DCF, comps, precedent transactions — is used in an M&A deal, but now in service of a single negotiated number rather than a constantly repricing public quote.
Deals are conventionally described from two sides: the acquirer (or “buyer”) and the target (the company being bought). A deal can be friendly, where the target’s board recommends the offer to shareholders, or hostile, where the acquirer goes directly to shareholders after the target’s board has rejected the approach — covered in depth in 2.10.
A sell-side auction for a private company runs in stages, and each stage exists to control a specific risk. A nondisclosure agreement comes first, because the seller is about to hand competitors its numbers. A short teaser and then a confidential information memorandum go to a long list of potential buyers; non-binding indications of interest (a price range) narrow the field to a handful, who get management meetings and a virtual data room for due diligence. The survivors submit marked-up purchase agreements with binding bids, and the winner signs a share or asset purchase agreement. Price is only one term: the agreement allocates risk through representations and warranties, indemnities, escrows, closing conditions and a material-adverse-change clause.
Signing is not closing. Under the Hart-Scott-Rodino Act, a US deal above the size-of-transaction threshold ($133.9 million for deals closing on or after February 17, 2026) must be filed with the FTC and the Justice Department if it also meets the size-of-person test (one party with at least $26.8 million and the other with at least $267.8 million in annual sales or total assets; deals above $535.5 million are reportable regardless of party size), unless an exemption applies, and the parties must wait, usually 30 days, before closing. A public target adds securities law: a cash tender offer must stay open at least 20 business days (SEC Rule 14e-1), while a one-step merger needs a shareholder vote and a proxy statement, which typically takes longer. A buyer pays a control premium over the pre-announcement share price because only control delivers the cash flows and decisions (Part 1.8: Precedent Transaction Analysis).
A seller wants $500 million, arguing Year-2 EBITDA will reach $60 million. The buyer believes $50 million and offers $420 million. They settle on $420 million at closing plus an earn-out: a contingent payment of $8 for every $1 of Year-2 EBITDA above $50 million, capped at $80 million. The buyer’s probabilities: EBITDA of $50 million (50%), $55 million (30%), $60 million (20%), paying $0, $40 million and $80 million.
Expected payment = 0.5 × 0 + 0.3 × 40 + 0.2 × 80 = $28.0 million. Discounted two years at 10%: 28.0 ÷ 1.10² = $23.1 million. The economic price is therefore 420 + 23.1 = $443.1 million, not the $500 million headline. Under US GAAP (ASC 805) the buyer books the earn-out at that $23.1 million fair value at closing and remeasures it every reporting period through earnings. If the business hits $60 million, the liability climbs to $80 million and the buyer reports a $56.9 million charge, a loss caused by the acquisition doing well.
If buyer and seller disagree about a forecast of a metric that can be measured within one to three years, bridge the gap with an earn-out sized to the disagreement, and value it at its probability-weighted present value, never its cap. If they disagree about a risk (a lawsuit, a tax audit, an environmental cleanup), use an escrow or an indemnity instead. Skip the earn-out when the buyer will fold the target into its own operations so completely that the metric can no longer be measured cleanly: that is where most earn-out disputes start. These are working heuristics, not legal rules.
Treating the headline price as the price. In the example above, the seller who announces a “$500 million sale” has an expected $443.1 million, a $56.9 million gap, and the buyer now controls the budget, staffing and accounting that decide whether the earn-out pays. Sellers who take an earn-out should negotiate the definition of EBITDA, operating covenants for the earn-out period and an acceleration clause on a resale; buyers should model the remeasurement charge before promising analysts a clean year.
How long does it take to buy a company?
A private-company auction usually takes several months from the first teaser to signing, because each round (indications of interest, diligence, binding bids) needs weeks, and closing follows only after regulatory approvals. In the US, a filing under the Hart-Scott-Rodino Act starts a waiting period that usually lasts 30 days, and a second request from the antitrust agencies can stretch a contested deal by many months. Public targets add a 20-business-day minimum for tender offers or a shareholder vote for mergers.
What is an earn-out in M&A?
An earn-out is part of the purchase price paid later, only if the target hits agreed targets such as revenue or EBITDA. It bridges a valuation gap: the buyer pays for the seller’s forecast only if the forecast comes true. Its fair value is the probability-weighted, discounted payment, which is usually far below the cap, and under US GAAP the buyer remeasures it every quarter through earnings.
Does every acquisition need antitrust approval?
No. Only deals that meet the Hart-Scott-Rodino tests need a premerger filing: a size-of-transaction threshold of $133.9 million in 2026 and, for deals up to $535.5 million, a size-of-person test, all adjusted every year, with exemptions for some deals. Smaller deals can close without filing, but the FTC and Justice Department can still challenge any deal that may substantially lessen competition, before or after closing.
An acquisition buys control through a staged process in which the purchase agreement allocates risk and regulators set the closing clock: an HSR filing above $133.9 million in 2026 when the parties also meet the size-of-person test and at least 20 business days for a tender offer. Earn-outs bridge forecast disputes, but their value is the probability-weighted present value, $23.1 million rather than $80 million in the example, and US GAAP remeasures them through earnings.
Four questions on this chapter. Decide on your answer first, then click “Reveal Answer.”
1. An earn-out will pay $0, $30 million or $60 million in one year with probabilities of 40%, 40% and 20%. At a 10% discount rate, what is its fair value at closing?
- About $54.5 million
- About $30.0 million
- About $21.8 million
- About $24.0 million
Reveal Answer
Answer: C. Expected payment = 0.4 × 0 + 0.4 × 30 + 0.2 × 60 = $24.0 million; discounted one year, 24.0 ÷ 1.10 = $21.8 million. The cap is not the value.
2. Under US GAAP, how does a buyer account for an earn-out classified as a liability after the deal closes?
- It records nothing until the target actually hits the target
- It remeasures it to fair value each period through earnings
- It keeps it at the closing value until the payment date
- It adjusts goodwill every time the expected payment changes
Reveal Answer
Answer: B. ASC 805 requires liability-classified contingent consideration to be remeasured each reporting period, with changes in earnings, which is why strong performance can produce a reported loss.
3. Which US acquisition closing in 2026 requires a Hart-Scott-Rodino premerger filing?
- Any purchase of a company listed on a US exchange, whatever the size of the deal
- Any deal giving the buyer more than 50% of the votes, whatever the size of the deal
- Any deal paid at least half in the buyer’s shares, whatever the size of the deal
- One worth more than $133.9 million whose parties meet the size-of-person test
Reveal Answer
Answer: D. The HSR obligation depends on deal size against the annually adjusted threshold, $133.9 million from February 17, 2026, plus a size-of-person test for deals up to $535.5 million, not on listing status, consideration or control percentage.
4. A buyer and seller agree on the business plan but disagree on whether a pending lawsuit will cost $40 million. Which tool does the chapter’s rule point to?
- An escrow or a specific indemnity for the lawsuit
- A longer antitrust waiting period before the closing
- An earn-out tied to next year’s reported EBITDA
- A higher headline price paid in the buyer’s own stock
Reveal Answer
Answer: A. Earn-outs bridge disagreements about forecasts of measurable performance; disagreements about a specific risk are handled by escrows or indemnities that ring-fence it.
- 17 CFR 240.14e-1 (tender offer periods) — 20-business-day minimum and 10 days after a price change
- FTC: 2026 update of HSR jurisdictional and fee thresholds — $133.9 million size-of-transaction threshold, $26.8 million and $267.8 million size-of-person thresholds, $535.5 million all-deals threshold, effective February 17, 2026