In a business transaction, what does an earn-out help to mitigate?

An earn-out is a financial arrangement often used in mergers and acquisitions where part of the purchase price is contingent on the future performance of the acquired company. By linking a portion of the payment to future results, an earn-out helps to align the interests of both the buyer and the seller regarding the ongoing performance of the business. This arrangement is particularly helpful when there's uncertainty about how well the acquired company will perform post-transaction, allowing the seller to earn more if the business meets or exceeds certain performance targets. Therefore, the earn-out effectively mitigates the risk associated with the future performance of the company being acquired.

The other choices address important considerations in business transactions, but they do not accurately describe the primary purpose of earn-outs. Financial instability and tax liabilities may arise due to various factors, but these are not specifically addressed or mitigated by the use of earn-outs. Disagreements over asset valuation are typically resolved through negotiation or due diligence processes, rather than through an earn-out structure, which is fundamentally focused on performance metrics and outcomes after the acquisition.