Jurisdiction(s):
United Kingdom

Related legal acts

Key definition

Performance ratchet definition

What does Performance ratchet mean? A performance ratchet is a contractual mechanism used in private equity and buyouts to adjust the equity allocation between investor and management shareholder groups by reference to pre-agreed performance hurdles. It typically increases management’s “sweet equity” or share of exit proceeds if the company or the investor achieves specified return thresholds (for example internal rate of return (IRR), money‑multiple or EBITDA targets), and may cap, reduce or leave unchanged that entitlement if targets are not met. Ratchets are usually embedded in the articles of association and the shareholders’ (or investment) agreement, and often interact with growth shares,...

Performance ratchets in UK private equity MBOs: employment-related securities tax, valuation, Managers’ MoU and section 431 elections

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Practice notes

Performance ratchets

This Practice Note explores the tax implications for the UK management team in a private equity-backed management buyout (MBO) that arise specifically from performance ratchets. Performance ratchets are a device employed by private equity firms investing in MBOs to motivate management and align their interests with those of the private equity backer. The success of an MBO is typically highly reliant on the management team. Managers can be incentivised, and their interests aligned, by subscribing for shares in the top company of the acquisition group (Newco 1), giving them a stake in the proceeds of a future private equity exit (ie on top of any salary). Performance ratchets give management the chance to uplift the value of their equity holding further where defined performance targets are achieved. This Practice Note concentrates on the tax issues arising specifically in relation to performance ratchets. For a wider discussion of the tax considerations relevant to management shares held in Newco 1, see Practice Note: Tax and management buyouts—management shareholdings...

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Web page updated on 21/05/2026

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