When the future income of the acquiree is regarded as uncertain, the agreement may contain a clause that requires the acquirer to provide additional consideration to the acquiree if the income of the acquiree exceeds a specified amount over some specified period. For example, A may agree to pay $100,000 to acquire B and promise to pay an additional $50,000 in two years if B earns at least $100,000 for the next two years. A is concerned that the owners of B are integral to the success of B and may not stay involved if they receive full payment immediately. This is an example of:
A)goodwill.
B)contingent consideration.
C)monetary assets.
D)intangible assets.

Question

Quizplus · Accepted Answer

The clause in the agreement that requires the acquirer to provide additional consideration to the acquiree if certain conditions are met is known as contingent consideration. In this case, the additional payment of $50,000 is contingent upon B earning at least $100,000 for the next two years. This is a common practice in acquisitions where future income is uncertain, and helps to incentivize the owners of the acquiree to stay involved and work towards achieving those targets.

When the Future Income of the Acquiree Is Regarded as Uncertain