Earnouts are used to bridge a valuation gap between a buyer and a seller. It’s a compromise, of sorts, to break a purchase-price deadlock when the seller wants more than the buyer is willing (or able) to pay.
In an earnout, a portion of the purchase price is paid out later, based on the company’s financial performance over time. Earnouts typically last from 1 to 3 years, subject to negotiation.
Some earnouts include acceleration provisions, stipulating that payments are due immediately if certain events occur e.g.,:
Buyer breach of post-closing covenants
Termination of key employees
Sale of the company or a substantial reduction in assets
These provisions are designed to protect the seller from changes that would hurt the company/buyer’s ability to meet their earnout targets.
Contact us to learn more about deal structures and how we protect your interests in a sale.
By Scott Bushkie
Scott Bushkie is Managing Partner and Founder of DealCoach.
With more than 20 years in the M&A industry, Scott is a recognized leader in the field, providing exit strategies and M&A advisory services to business owners in the lower middle market. He has successfully executed sales to domestic and international buyers, private equity firms, family offices, and strategic buyers. Follow DealCoach on Linkedin