The give and take of earnouts

Description

Abstract: In a business acquisition, the buyer and seller may have difficulty reaching agreement on the business’s value. To avoid a tug of war, both parties may benefit from an earnout provision requiring the buyer to make future payments to the seller. This article points out the components of a typical earnout provision, including a quantitative formula to determine how much is to be paid if the business reaches a specific financial target, and when, and how many, payments are to be made. The article concludes that an earnout provision can bridge the valuation gap and ensure the deal will be beneficial for both parties.