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ARTICLE · 15 JANUARY 2024

About Earnouts… And Reducing Owner Dependence To Avoid Them

IR Global
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An earnout means the Buyer pays for a business using the earnings from the business, usually with an initial down payment The amount due to the Seller will usually decrease if earnings...

United KingdomFinance and Banking
Mark Ferris (Panalitix)
Mark Ferris (Panalitix)
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What is an earnout? An earnout means the Buyer pays for a business using the earnings from the business, usually with an initial down payment The amount due to the Seller will usually decrease if earnings don't meet expectations

Why structure a deal as an earnout? Selling an Accounting business involves risk, ESPECIALLY when Clients (and maybe employees) won't continue with the firm This risk is usually much higher where the business is highly dependent on the Seller 'Dependence' might mean that Clients or employees are highly loyal to the Seller AND/OR that the Seller produces a lot of work AND/OR that the Seller manages important processes in the business An earnout reduces the Buyer's risk and increases the Seller's risk because payment to the Seller is linked to business performance (earnings) after the transaction In an earnout, therefore, the Buyer's and Seller's goals and interests may not be fully aligned.

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