Earn out periode – yes or no?

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Viewing 5 posts - 1 through 5 (of 5 total)
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  • #126904
    Lena Friese
    Participant

    What are your thoughts on an earn-out period of 2 years? Where the sellery is based on the profit we are realizing with the acquisition.

    #127728
    Cristina Girtu
    Participant

    Hi Lena,
    I think it’s a good way to incentivize people to collaborate and contribute to the growth of the company.
    Cristina

    #127805
    Gregg Hardin
    Participant

    I think the premise is a good one, based on profits or tied to performance metrics of post-merger performance. However, I think timeframe would be dependent on the complexity of the business including complexity of the acquisition. Simple, smaller mergers may need less time from the seller.

    #128043
    Tyler Grimm
    Participant

    Hi Lena,

    This response really comes down to goals of the buyer and seller. Do the 2 years sufficiently keep the seller engaged in the success of the business and are there other factors such as ownership and leasing of the building? Are the 2 years sufficient to provide the seller with the right amount of smoothing of funds for tax mitigation? Is this considered a standby for a loan? If the SBA is involved for lending, an earn-out is generally restricted from a deal given subjectivity and potential for legal challenges.

    #128586
    Roberto Ochoa
    Participant

    If you’re the seller I’ll add that you should also consider negotiating a mid-point earn-out, in this case, 1 year. This way, if you hit the target the first year, you get 50% (or any other %) of the earn-out “in advance”. If you hit the second’s year target, you’ll receive 100%, but if you don’t, at least you have received 50% of it. This way the earn-out is not binary (yes or no / 100% or 0%).

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