What is an earn-out?

In negotiations, the seller and purchaser may not agree on projected earnings or the value of the business.

A deferred payment or earn out, that bases a portion of the valuation on actual future performance, can be the solution to this problem. For example, in one situation, the parties settled with an earn-out agreement that required the purchaser to pay 10% of all sales in excess of $500k during the three years following the sale in addition to the purchase price.

In this situation, if sales grew as the seller had projected, they would receive more for the business. However, if sales did not increase, the purchaser would be paying an amount based upon current revenues.

Thus, an earn-out agreement can soften the risk of speculative projections while also putting more money in the seller’s pocket. Earn-outs can also serve as incentives to keep the seller engaged in the day-to-day operations of the business.

Contact the Mergex team to ensure that you are well supported in this process.