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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.
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