There’s an interesting article published recently about “earn-outs,” by merger-and-acquisition guru Scott Lochner.
What’s an Earn-Out?
According to Lochner, “If there is disagreement about the business value of a company whose assets or shares of stock are being potentially purchased and sold in an M&A transaction, it is common to include an “earn-out” provision as a portion of the purchase consideration.”
An “earn-out” is basically a payment for work and performance after a deal is closed. For example, if a seller believes the value of a company is $55 million or more and the buyer thinks it’s worth only $50 million, than the gap in purchase consideration is five million dollars.
That $5 million gap can be closed with an “earn-out,” or a contract that allows the seller to earn up to that $55 million or more if the business sold performs on an agreed target (financial or non-financial) over an agreed amount of time. (more…)