Mergers and Acquisitions: Safeguarding the Price After Closing

M&A transactions (mergers and acquisitions of companies) in Uruguay have become more sophisticated in recent decades, due, among other reasons, to advances in rules and regulations that directly affect the target companies, as well as the adoption of instruments and practices that have proven effective in other jurisdictions.Generally, these solutions and practices originate from the United States and Europe, which represents a challenge for local advisors to adapt to the Uruguayan reality, and at the same time, an opportunity to make transactions increasingly efficient and secure for the parties, considering the risks assumed by buyers and protecting sellers when price financing is available.Below, we briefly analyze mechanisms increasingly used in local practice, such as earn-outs, price retentions, and escrow accounts. These not only safeguard prices, mitigate risks, and align incentives, but also reflect a shift toward more transparent and efficient sales models tailored to the specific needs of each company.Earn-Outs: Price Subject to the Future Performance of the Acquired CompanyThe earn-out mechanism is used in transactions in which the sellers play a decisive role in the company's operations after the sale, and its performance largely depends on their management. Earn-outs are particularly useful in transactions involving companies with high growth potential but uncertain valuations or with a strong intangible component, as is the case in sectors such as technology, healthcare, or professional services.They allow part of the purchase price to be deferred, subject to the acquired company's achievement of certain objectives, agreed upon by the parties in a schedule of targets and payments to be made against achieved goals.The agreed targets may be linked to financial indicators such as EBITDA or revenue, or to specific operating results, such as the acquisition of new customers or the integration of certain technology.When agreeing to earn-outs, it is important to clearly regulate how the company's business will be managed and what decision-making power both sellers and buyers will have, in order to avoid situations in which decisions are made that influence or affect results and variables. Therefore, it is key to establish a clause that includes clear metrics and accounting rules that oblige the parties to act in good faith or with reasonable efforts to achieve the agreed-upon objectives.

This mechanism represents a guarantee for the buyer that the seller will make every effort to meet objectives that will ultimately benefit the acquired company, while allowing the sellers to obtain a percentage of the price tied to their own performance at the helm of the company.Holdbacks or Financed Price: The Balance of the Price as SecurityHoldbacks and financed price agreements are clauses that allow the buyer to defer a portion of the price payment, holding it as security for the seller's compliance with various obligations, particularly the indemnity obligation, arising primarily from the representations and warranties granted by the seller. A portion of the price is not paid at the closing of the transaction, but rather after a retention period typically set between two and four years. If no contingencies of the deal materialize during this period, the withheld amount is released to the seller as agreed. They are used in transactions where the target company has contingencies identified during the due diligence process, such as labor, tax, or contractual liabilities, or when the company is unaudited or underregulated. The application of these instruments requires a precise definition of the events that allow or prevent the release of withheld funds, as well as the procedure for resolving disputes if claims arise.Sellers often request that an interest rate be applied to the withheld amounts, whether fixed or variable, tied to local indices (CPI, UI, BPC, UR) or international indices (US Consumer Price Index). In turn, the effective release of the withheld price can be guaranteed at the seller's request through, among other instruments, the creation of real collateral (mortgage, share pledge), the establishment of a security trust, or through financial instruments (guarantees, letters of credit, sureties). Escrow: Neutrality and Transparency in the Execution of Contingent Payments An increasingly used tool in local transactions is the creation of escrow accounts. This involves an independent third party—usually a bank or trustee—holding a percentage of the purchase price in custody until certain conditions agreed upon in the sales contract are met or until a predetermined period of time has elapsed. It offers transparency and legal certainty and is used to cover indemnity obligations or to channel payments subject to contingencies, including the post-closing earn-outs or price adjustments mentioned above. The escrow agreement should precisely establish the conditions for releasing funds, the timeframes involved, and the procedure in case of disputes. In larger transactions, this mechanism is often combined with insurance and guarantees (which are very common in international transactions), allowing the parties to further distribute the residual risk. Proper implementation of escrow requires clear instructions and an agent who acts strictly neutrally and adheres to the contract's stipulations.The parties may agree that the amount held in escrow will be invested in financial instruments that can be liquidated if payment is required. They must also regulate the distribution of any potential profits from such investments.