What does "contingent consideration" refer to in an MandA deal?

Contingent consideration in an M&A deal refers to additional payments made to the seller based on future performance metrics. This mechanism is often included in transaction agreements and serves as a means to align the interests of the buyer and seller after the acquisition. The seller may receive these payments if the acquired company meets specific financial targets or operational milestones over a defined period following the deal's closing.

This arrangement not only helps manage the risk for the buyer, as it ties a portion of the purchase price to the future success of the acquired business, but it also provides an incentive for the seller to ensure a smooth transition and continued success post-acquisition. By linking a portion of the payment to performance, both parties can agree on a deal structure that addresses uncertainties related to the future potential of the business being acquired.