If you think an earn out is necessary why do you think it's a good idea to buy the business?

September 25, 2024

by a professional from University of Southern California - Marshall School of Business in North Palm Beach, FL, USA

That's the question I ask. What do you think about it?

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Reply by a searcher
from University of Maryland at College Park in Annapolis, MD, USA

Earn-outs can have utility in many circumstances, particularly when there is a gap between buyer and seller valuation expectations due to risks that will naturally resolve themselves over time. In some situations this valuation discrepancy is reasonable and well-founded, such as with rapidly growing businesses, or when a company has recently signed a major contract, or when there is client concentration risk, or when a major client is nearing the end of their contract and renewal is uncertain. In these and similar situations, with the passage of time the buyers risk has been mitigated and the business may have demonstrated that it was worth the premium valuation that the sellers wanted (or was necessary to win the deal).

We like to tie the earnout to the seller's five year projections or specific milestone events. If the business performs as the seller projected, then some or all of the earnout is earned. If the business does not attain the projected threshold results, then the initial valuation remains.

Feel free to contact me for more information or to discuss a specific situation.

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