Purchase Price Components

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by a searcher from Stanford University - Graduate School of Business
in Dallas, TX, USA

2yrs ago

Purchase Price Components

Do certain industries see more prevalence or suitability for earnouts and clawbacks, given that both mechanisms necessitate meticulous negotiation and agreement on terms such as conditions for extra payments, metrics, assessment timeframes, and overall sums in the acquisition agreement?

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reply by a searcher 2yrs ago
from Gonzaga University in Denver, CO, USA

I can't speak to clawbacks (we have not worked any into a deal), but for earnouts we have found it is helpful to work them into relatively high growth deals where there is a founder asking for a higher multiple. This helps us buy down the multiple if they don't hit, and justify a higher purchase price if they do. In our experience the things that have made a earnout more palatable are less industry related and more deal related:
- Founder staying onboard to help drive growth
- Earnout paid on the high side with a high ceiling even above base case (founder gets a carrot), and helps protect the downside (investors get protection)
- Market (like now) where sellers have equal or less negotiating leverage than buyers

reply by a searcher 2yrs ago
from Liberty University in Austin, TX, USA

This definitely makes sense. Interesting seeing the market shift relatively quickly. Seems like not long ago it was a sellers market!