Earn-Outs: A Viable Solution
A major point of contention between buyers and sellers in M&A transactions is the purchase price. Earn-out agreements provide buyers and sellers with an effective technique to “bridge the price gap.” Although opinions and experiences vary widely, carefully structured earn-outs can mitigate risk and successfully meet the needs of both buyers and sellers. Risk reduction opportunities permeate throughout earn-out agreements and may include (but not limited to):
- Performance metric selection – must be verifiable, well-defined, universally-understood
- Negotiate caps and floors – guarantees a minimum or limits total consideration
- Security arrangements – hold a portion of the earn-out in escrow, request a lien on company assets/shares, request guarantee from bank/parent company
- Engage external financial and legal resources proactively – use of legal and financial professionals on the front-end averts surprises post-transaction
Eliminating risk in its entirety may be an unlikely proposition; however, buyers and sellers, equipped with experienced professional advisors and the will to close, can minimize risk and execute a mutually-beneficial earn-out agreement.