Earnout Deal Structures

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July 29, 2022

by a searcher from University of Pennsylvania - The Wharton School in Philadelphia, PA, USA

Can anyone recommend a resource to understand standard earnout deal structures? I have no experience there. I'm interested in knowing things like (1) typical % of revenue (2) standard term (years) (3) cap (max amount paid to seller) vs. no cap (4) any other variables I haven't thought of.


Thanks!

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Reply by a searcher
from University of Nevada in Henderson, NV, USA
I would say ideally for cleaner purposes go with the revenue route to avoid arguments with amount of the expenses dropping to the bottom line. However, know what the price of the business is worth and what you think the business will make that year. Then if the seller says he thinks its more, then I say to them, well the remaining amount will be in an earnout of anything over a specified number and I would cap it at about 15% above the base number each year. Then that earnout would be paid out each year until you reach that specified total amount
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Reply by a searcher
from University of Pennsylvania in Portland, OR, USA
Jeff - I don't believe there is a "standard" earnout structure. However, I'd be happy to discuss some potential options we have recently used. I'd caution you that many earnout structures lead to litigation, so the more clarity you can create with structure the better off you will be. For example, using REVENUE vs EBITDA to avoid arguments about what expenses should or should not have been included. Probably easier to discuss in person. I'll send you a DM.
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