Earn-outs

In this article we explore so called "earn-out" deals: what they are; why they are used in private M&A transactions in the advertising and marketing industry; and some of the issues that they pose for both buyers and sellers.

What is an earn-out?

An "earn-out" deal is a transaction where all (or more usually part) of the consideration a buyer pays for a business is paid out after completion. Under an earn-out deal, a buyer typically pays some cash up-front, but the rest of purchase price is deferred and contingent on the future performance of the business.

The deferred payments are commonly based on some measure of the target's future profit (such as earnings before interest, tax, depreciation, and amortisation or "EBITDA"). But they can also be based on revenue or any other type of commercial target, such as sales volumes.