I’m interested in acquiring a business that hasn’t proven to be profitable except in the last twelve months. They seem to have a promising backlog. However, I won’t be able to get conventional lenders to pony up the cash. I can leverage the real estate though to offer cash for the acquisition (it’ll be a bridge loan with no principal payments, just interest).

How can I structure the earnout, and what are the mechanics of it? For instance, if I offer an earnout, do I have to put the entire amount in escrow?

Ideally, I’d like to be able to refinance the debt each year they achieve the necessary results because I don’t have any cash to give except for what I can raise from the real estate.

Example Valuation: $10m
Year 1: $3m EBITDA achieved
Year 2: $3.5m EBITDA achieved
Year 3: $3.8m EBITDA achieved

How much should they be paid each year, and where does the money come from?