The earnout is not a new tool or technique. It is utilized in many M&A transactions wherein one or both of the parties feel the need to mitigate risk. If a buyer believes an attribute of the business is not as strong as the seller believes it is the buyer may convince the seller to accept future payments should the business achieve certain milestones regarding performance. Another example could be that the seller wants to participate in the financial upside (post close) that they feel they have “left on the table” in terms of the price. Many other deal dynamics and or uncertainties may exist in any given deal and the parties can utilize earnout techniques to come together. Recently the website Axial published statistics that its advisor members shared about 50 of their client’s earnout performances.
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