Canadian Searches: experience with lenders when there is earnout

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by a searcher
in Kelowna, BC, Canada

1yr ago

Canadian Searches: experience with lenders when there is earnout

What are your opinions and experiences with financing deals that include seller earn-out terms? How do lenders perceive this, especially when the earn-out is aggressive, such as up to 20% of the purchase price?

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reply by a searcher 1yr ago
from Western University in Toronto, ON, Canada

If you haven't already, I'd recommend talking to the Big 5 plus National for some guidance on the commercial lending side. My experience doesn't differ from the above comments - aka need skin in the game - but each senior debt lendor will have some leeway depending on the relationship you can build with them

reply by a searcher 1yr ago
in Kelowna, BC, Canada

Thanks everyone, for the detailed and well-thought-out responses. To summarize, and if I am understanding correctly, the answer is "it depends."

Because earnouts can be complex and variable, banks want to see terms that ensure their protection across all potential outcomes.

On the low end, the earnout should not cause global debt servicing to increase beyond what the business currently supports. On the high end, it should be sufficiently tied to the EBITDA increase of the business to ensure it doesn't impair the senior debt serviceability.

Seems like I have more to discuss on earnout structuring. I'll do some research and reach out to this fantastic group for feedback.