Earn Outs as part of acquisition deal

This topic contains 1 reply, has 2 voices, and was last updated by  Petros Lampropoulos 2 weeks, 2 days ago.

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  • #112708

    Denise Gingolaski
    Participant

    I am curious of how other companies deal with earn outs as part of the acquisition. In my company’s first few acquisitions, there was an earn out provision whereby former owners could earn x dollars if the revenue hit a certain level or maintained a certain level over the course of the first year or two.

    It was turning into an integration nightmare because my company would want to change the billing cycle for the acquired customers. Or we would want to change the payment terms. The former owners would be upset because they thought customers would leave if that was changed. They also would say we were comparing apples to oranges if they had a certain dollar amount of revenue in one year and because of a different billing cycle, the revenue was different. Many of our acquisitions involved smaller businesses who followed the cash basis of accounting rather than the accrual basis. It was difficult (nearly impossible in some instances) to integrate if we were expected to calculate an earn out.

    Also, you can’t really tell the former owner that their earn out is the least of our concerns during the integration process, when the earn out is their only concern.

    In later acquisitions, we took any earn out discussions off the table for deals.

    #113046

    Petros Lampropoulos
    Participant

    In my organization we like to use earn outs or conditional payment structures as part of the deal and mostly in those cases that the revenue sustainability is questionable and the business plan assumptions are vague and based on very weak or no historical benchmarks. In most of the times we structure the deal in a way so that the targets management remain in place and we work with a mutual target to increase revenue and meet the business plan numbers trying to provide support and maximizing synergies. Both an earn out and a conditional payment (upon meeting specific targets) provides a hedge mechanism towards a ROI risk and towards a questionable short term future

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