Seller Earnouts

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November 06, 2024

by a searcher in Traverse City, MI, USA

I’m trying to get more clarity on different ways to structure seller ear outs and when it’s best to use them. Does anyone have good resources or experience to share on seller ear out structures and best use cases? Thanks!

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commentor profile
Reply by a professional
from University of Nottingham in London, UK
The seller will prefer the earn out to be pegged to a metric as high up the P&L as possible (usually revenue or gross profit). It is possible to peg it to EBITDA however this will need the SPA to be more detailed with specific protections restricting expenditure.

It’s best to use an earn out to give you a bit more security over future performance (important distinction here between earn out and deferred consideration which is purely to assist with funding).
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Reply by a searcher
from McGill University in Toronto, ON, Canada
A couple additional points on top of the ones already made: (1) it can also be used to align incentives. It's useful to think through what behavior your earn out will create from all stakeholders. (2) one can attempt to add a portion of the earn out to a VTB (eg 50% paid in cash, 50% added to earn out)
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