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%?

0 Likes

20 Replies

278 Views

Replies

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.

Reply by a searcher
from University of Maryland at College Park in New York, NY, USA

Be careful... Earnouts are great but the water gets deep very quickly. You are trying to incent the former owner to help u to run a biz he no longer controls. Tough! You may be rightly hiring staff and investing in the biz. However if u are paying me on anything tied to profitability I'm screwed if the earnout is tied to that! Fuels resentment often cured in court. Pay him off something he can help with rev growth or gross margin. Or flip the script and use a profit share %. He thinks the biz can grow to the moon, great here is a 5yr profit share. If he is right he will make more than asking...

+18 more replies.

Join the discussion