A performance-linked investor payout needs measurable terms
Define performance measures, periods and evidence for a proposed contingent investor exit payment rather than treating it as fixed debt instalments.
Corporate Recovery Partners
01 / 06
Part of the exit price depends on future results
The investor accepts a smaller amount now with an additional payment if the business meets a later performance target. That proposal differs from a fixed instalment schedule. Before describing the exit as affordable, establish exactly what result triggers payment, how it is measured and who is responsible for preparing and reviewing the calculation.
Clarify whether the trigger concerns revenue, cash receipts, gross profit or another defined result. Identify the period and businesses or projects included. Similar labels can produce different answers. Ask the accountant and lawyer to review the proposed definitions rather than assuming everyone has the same understanding of a phrase such as a good trading year.
Business.gov.au's contract guidance recommends clear fees, responsibilities and payment arrangements. Apply that approach to the contingent amount and its measurement process. Discuss the necessary records, review rights and treatment of disagreement with the advisers. This article does not prescribe a suitable legal structure or determine how an investor's existing rights can be changed.
Imagine the business records higher sales but customers pay after the measurement period. A revenue-based trigger and a receipts-based trigger would assess different facts. Work through the actual proposed wording with representative examples. Do not silently choose the more convenient interpretation after the result is known or promise that the contingent payment can always be funded from the measured figure.
Show when the payment could become due alongside operating commitments and other obligations. Consider how the calculation process and payment timing interact. Keep the agreed contingent amount separate from guaranteed instalments in the forecast. A condition may reduce certainty about whether payment arises, but it does not eliminate the need to assess the resulting cash requirement.
Retain the reviewed definition, examples and reporting arrangements with the exit documents. Ensure those preparing the later accounts understand the measurement requirements. A performance-linked payout is easier to assess when the parties can reproduce the same calculation, rather than leaving the final price dependent on a phrase whose meaning changes once the business knows what it has earned.
