EarnOut Strategy

September 03, 2024

by a searcher from IE Business School in Madrid, España

Hello, I am about to sign an LOI with $ 9 M Payment Upfront (3.0x EBITDA) and 4 Millions in Earnout $2 in 2025 and $2 in 2026.
Any recommendations when setting the target for the payment? Ex: growth on EBITDA, Paid 0-100%?

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Reply by an investor
from University of Pennsylvania in New York, NY, USA

Congratulations on being able to push so much of your purchase price to deferred! You didn't ask but one thing you should consider is how are you going to pay for the earnout if it achieves 100% payout. You can of course try to make it "self-funding" where EBITDA growth will drive the earnout, but watch out, as that kind of growth can drive a lot of other cash flow needs like working capital and capital expenditures. I'd recommend talking to your bank about a delayed-draw commitment where you can get a larger loan based on the higher EBITDA.

Reply by a professional
from University of Southern California in North Palm Beach, FL, USA

My 4 Non-Negotiables for Buyers Proven Earnings Only: “No paying for ‘potential.’” Full Due Diligence: “No blind bids.” Earn-Outs: “Protect yourself with contingent payments.” Walk-Away Power: “Set a max bid and stick to it.” Side note: better yet, learn how to find better businesses for sale instead of taking a chance of losing everything, after you discover your earn-out or forgivable seller note reduces the price you paid, but leaves you bankrupt, and the business' employees unemployed.

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