M&A Advisor Tip: Earnouts Break Valuation Deadlocks

/in /by Exit Strategies

Earnouts are often 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 harm the company/buyer’s ability to meet their earnout targets.

For further information on earnouts and other common M&A deal provisions, contact Al Statz at 707-781-8580 or alstatz@exitstrategiesgroup.com.