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What is an Earn-out?

Simply put an Earn-out is a method of linking deferred payments to the future performance of a business sold.

In most cases an initial payment is agreed with future payments dependant on meeting set financial performance targets. The business owner will usually continue to run the business day-to-day during the Earn-out period.

Is an Earn-out right for me?

Generally speaking an Earn-out should not be a seller’s first choice, however in some cases this may be the only way to achieve the vendor's desired upper valuation.

In other cases the business may have issues or suffered a bad period of trading leading to temporarily reduced financial performance. In this instance an Earn-out might be necessary to convince the buyer the business can overcome these challenges and puts the seller to the test of delivering against targets.

You should only agree to an Earn-Out if you can dedicate yourself to running your business with enthusiasm, most Earn-outs last between 12-36 months and during this time you will be working with the new owners.

It is likely that up to 50% or more of the consideration will be paid through the Earn-out provision of the agreement. Therefore it is important the payments are graded. You don’t want to receive 0% for missing a target but instead a reduced payment should be agreed linked to the financial performance levels of the business.

What are the benefits of an Earn-out?

In some cases an Earn-out will be the only viable way to complete a deal in these cases the benefit is to bring the negotiations to a successful completion.

An Earn-out might also be the only way to achieve the vendors desired valuation, as long as the targets can be met this option can secure a premium for the business which the buyer is more inclined to pay due to the payments being spread out over a period of time.

 

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