Earnouts - Don’t Be Afraid

Mergers & Acquisitions

July 27, 2012

When heightened uncertainty regarding future earning potential on both sides of an acquisition creates a purchase price gap, earnouts can be a powerful tool to ease competing concerns of buyers and sellers. By harnessing the shared interests of buyers and sellers during earnout periods, earnouts provide a mechanism by which a seller potentially can achieve a higher purchase price than in an all-cash deal, while permitting the buyer to hedge the purchase price to ensure future earnings results. An exploration of the shared incentive structure of earnouts, and a note of caution for their use, will be helpful to illuminate their particular utility in the current economic climate.

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