EarnOut Strategy

by a searcher from IE Business School

1 month ago

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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investor from McGill University

You might consider structuring the earn out around the big risks or big bets in the deal. Customer concentration? A GM sticking around? Employee/customer churn? I would tie the earn out to specific parts of your deal that are vital

1 month ago | like reply | 0 likes

investor from University of Pennsylvania - The Wharton School

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.

1 month ago | like reply | 0 likes

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