Earn-outs are very common these days in transactions where an
owner is selling a business. I'm working on a number of
transactions right now that have an earn-out component to them.
Before 2008, most transactions involved the seller getting most
if not all of the purchase price on closing. If there was a
deferred payment, it would be for a set amount and on the basis of
a holdback for fairly short period of time – perhaps three to
six months. Once the 2008/2009 recession impacted the market,
business owners found that buyers were asking for earn-outs as part
of the purchase price. Why the change in direction?
An earn-out is simply the method by which a purchaser seeks to
reduce the risk it is taking on when purchasing a business. Of
course, when a purchaser reduces its risk, the effect is that the
seller takes on more risk. So, from the seller's perspective,
the earn-out is not something a seller should agree to right away.
The earn-out works to reduce risk to the
