Earn-Out Or Burn Out: Key Issues To Consider

Lack of cash and/or borrowings and a widespread lack of confidence in these challenging times are resulting in more M&A deals being done on the basis of an element of deferred, and often contingent, purchase price. Earn-outs are now an even more common feature in deals.

What Is An Earn-Out?

An earn-out is a seemingly simple idea: at least part of (and sometimes all of) the purchase price is to be calculated by reference to the future performance of the acquired business and paid later. This structure can have advantages for buyer and seller. The seller gets a chance to "earn" a premium purchase price for the business. The buyer can bridge the gap in the seller's price expectation and remove an element of risk from the deal. Clearly, there are also cash-flow advantages for the buyer.