Performance anxiety? Earnouts can help

Description

Abstract: Given the current state of the U.S. economy, it’s not surprising that both business buyers and sellers are entering M&A transactions with increased trepidation. One way to get the deal done is by using an earnout, which sets a company’s purchase price according to how well it performs after it’s sold. It can be especially useful in bridging valuation gaps or overcoming negotiation stalemates in which the parties disagree about the company’s future profitability. But there are potential pitfalls, so participants need to ensure the agreement protects their interests and anticipates potential conflict.