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Marital Property and “Earn Out” Purchase Payments for Sale of Businesses

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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.

Analysis:

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.

Excerpt:

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.

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