Marital Property and “Earn Out” Purchase Payments for Sale of Businesses
There are many creative ways to structure the sale of a business to attempt to reduce the amount divided in a property division. This one did not work.
In re the Marriage of Gill
No. A16-1421 (Minn. App. 8/14/2017)
Reversed and remanded. Judge John R. Rodenberg.
When the marital interest in a business entity is sold and includes, as part of the sale price, a provision for “earn-out” payments based on future company performance, the earnout payments are marital property, notwithstanding purchaser’s employment of one of the spouses under a separate employment agreement during the “earn-out” period.
When a purchase contract for a business specifies a portion of the purchase as being an “earn-out” or payment from the earnings of future profits, those amounts are marital property as they represent the purchase price and not the individual salary of a party to the marriage.
The purchase agreement unambiguously provided that the purchaser of DGG was willing to pay $180 million plus two earn-out payments not to exceed a total of $170 million, over the course of two years, and computed under a formula set forth in the agreement. The earn-out payments were to be received by all of the sellers regardless of whether a seller continued work for purchaser after the sale. Because the earn-out payments were part of the purchase price for DGG, they reflect DGG’s value as of the purchase date. The earn-out payments were payable to Wyndmere LLC, which is part of the marital estate. Therefore, the earn-out payments are marital property and subject to division as such. We reverse the district court’s award of the earn-out payments to husband as his nonmarital property, and remand to the district court for further proceedings consistent with this opinion.
Source (You may be required to accept the terms and reopen the link)