Best earnout framework?

by a searcher from Harvard University - Harvard Business School

5 years ago

I'm in discussions with the owner of a small b-b and b-c service company that is slightly profitable.  Successful transition will require his continued involvement for 1-2 years.  I'm considering an earnout framework and am looking for ways to make it easy to keep it clear, aligned and successful.  Any experience to share?  Thanks.

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searcher from Harvard University - Harvard Business School

Equity is often best to ensure alignment if you have an approximately similar time horizon, but you could end up carrying the opportunity cost of the seller's shares long after the seller's contributions have diminished. Seller note is worth considering. If you with a cash-based approach, a revenue-based metric is the cleanest but least precise approach. The further down the P&L you get (gross profit, ebitda, etc.), the more precisely you can tailor the desired outcome (> profit), but the likelihood of a dispute / risk of misalignment goes way up. In all cases you have to bear in mind how any cash obligation will be funded, and try to negotiate for flexibility.

5 months ago | like reply | 0 likes

searcher from Universität Vienna

Can consider to let the seller keep a part of the shares and define a specific valuation formula for the point in time when the earn-out is due to take over the remainder of the shares

7 months ago | like reply | 0 likes

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