We have extensive experience in the valuation and measurement of contingent considerations, call and put options and other complex instruments related to business combinations. We support companies, investment funds and audits in the application of the best valuation practices and applicable accounting requirements, contributing to a more efficient management of the risks associated with these obligations.
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In recent weeks, the case involving one of the largest educational groups in the country and the repurchase of a relevant higher education institution that had previously been part of its portfolio has gained prominence in the Brazilian financial market
The transaction, announced for approximately R$ 410 million, was met with questions from investors and analysts, who discussed not only the economic aspects of the deal, but also the possible existence of long-term contractual mechanisms, such as call and put options, often used in mergers and acquisitions.
Regardless of the particularities of the case, the repercussion served to put back into evidence a topic that usually remains out of the spotlight after the close of business: the existence of future obligations linked to buy (call option), sell (put option) and earn-outs, whose financial impact can grow significantly over time.
It is precisely at this moment that a contractual risk can turn into a financial risk.
What the market cases reveal
A famous example in Brazil was the acquisition of the São Francisco Group by Hapvida, announced in 2019 for approximately R$ 5 billion, price adjustment mechanisms and future conditions were part of the structure of the operation. Although it has not become a case of public controversy, the transaction illustrates how agreements of this nature often incorporate contingent components that require continuous monitoring over the years.
The same occurs in the technology industry. As the startup market has matured, earn-outs have become widely used to bring expectations closer between buyers and founders.
In several transactions, relevant portions of the acquisition value remain conditional on the achievement of future revenue, EBITDA, cash generation or user growth targets. It is not by chance that disputes related to the calculation and interpretation of these clauses are among the most recurrent issues in arbitrations arising from M&A transactions.
The common denominator between all these examples is simple: seemingly secondary obligations during trading can turn into highly relevant financial commitments years later.
After all, what are call options, put options, and earn-outs
Although widely used in M&A transactions, these mechanisms have different purposes, but they share a common characteristic: they can generate relevant financial obligations years after the transaction is concluded.
| Instrument | What is it? | Main feature |
|---|---|---|
|
Call Option (Opção de Compra)
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Right granted to the buyer to acquire the remaining interest of the seller at a future date or under certain pre-established conditions.
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It allows the buyer to expand its stake or take full control of the business in specific circumstances defined in the contract.
|
|
Put Option (Opção de Venda)
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Right granted to the seller to require the buyer to acquire its remaining interest at a future date or under certain conditions.
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It may generate a relevant financial obligation for the buyer at a future date, usually calculated by means of a contractual formula.
|
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Earn-out
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Additional portion of the acquisition price conditioned on the future performance of the acquired company.
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The amount of the payment varies according to the achievement of previously established financial or operational goals.
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Although they have legitimate objectives of alignment between buyer and seller, these mechanisms introduce financial uncertainties and, therefore, require adequate monitoring and measurement throughout the life of the transaction.
What do accounting standards say?
Measuring these obligations is not just a good financial management practice. In many cases, this is an accounting requirement. In the context of business combinations, CPC 15 (R1) – Business Combination, convergent with IFRS 3 – Business Combinations, determines that contingent consideration assumed in an acquisition is initially recognized at its fair value at the date of the transaction (paragraphs 39 and 40 of CPC 15; paragraphs 39 and 40 of IFRS 3).
Subsequently, when applicable, these obligations must be reassessed on each reporting date, observing the concepts established by CPC 46 – Fair Value Measurement, equivalent to IFRS 13 – Fair Value Measurement.
In addition, certain structures involving call and put options on equity interests may be classified as financial liabilities, requiring recognition and measurement in accordance with CPC 48 / IFRS 9 – Financial Instruments and CPC 39 / IAS 32 – Financial Instruments: Presentation, depending on the contractual characteristics of the transaction.
In other words, future obligations arising from acquisitions should reflect, at each balance sheet date, the best estimate of their economic value at that time. Therefore, puts and earn-outs should not be treated as static values. Changes in financial projections, market conditions, or probabilities of occurrence of contractually anticipated events can significantly alter their value over time.
Main consequences of not measuring properly
| Risk | Potential impact |
|---|---|
|
Financial covenants
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Distortion of leverage indicators and possible non-compliance with contractual financing clauses.
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Liquidity
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Unexpected need for cash to settle future obligations, requiring additional fundraising or debt renegotiation.
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Financial planning
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Projections of cash flow, dividends, investments, and capital allocation based on incomplete assumptions.
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In many cases, the effects do not arise only at the time of liquidation of the instrument, but throughout the period in which strategic decisions are made based on financial information that does not fully reflect the company's future obligations.
What is the most appropriate way to measure these instruments?
The answer depends on the economic nature of the obligation and the way it is contractually structured.
| Contractual structure | Most applicable methodology |
|---|---|
|
Multiple applied at a previously defined future date (e.g., EBITDA multiplied by a fixed multiple)
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Deterministic model with present value calculation
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Binary structure dependent on specific future event (regulatory approval, achievement of operational milestone, or trigger-conditioned exercise)
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Model scenarios with probabilities of occurrence
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Variable structures with multiple triggers, compensation steps and several interdependent variables
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Monte Carlo Simulation
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Regardless of the methodology used, the objective must always be the same: to capture as faithfully as possible the economic reality of the obligation.
Excessively simplified models can generate relevant distortions. On the other hand, sophisticated models without consistent assumptions can only convey a false sense of accuracy. The challenge is to find the balance between technical robustness, contractual adherence and economic reasonableness.
Conclusion
In M&A transactions, puts, calls and earn-outs may remain relevant for many years after the closing of the transaction. Therefore, its continuous monitoring and periodic remeasurement at fair value are essential for the financial statements to adequately reflect the obligations assumed, providing greater financial predictability, transparency and support for decision-making.
In a business environment increasingly marked by acquisitions, consolidations, and strategic investments, understanding the economic effects of these instruments is no longer just an accounting issue but an important element of corporate risk management.
How can Grant Thornton help?