Earn Outs as part of acquisition deal

This topic contains 3 replies, has 4 voices, and was last updated by  Nick Picone 1 month 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

    #113854

    In our organization we used to use earn outs quite frequently but have made mixed experiences with it. Some of the problems have been pointed out here. In my opinion earn outs conceptually work great but the devil is in the detail and those “details” often turn out to be quite crucial and often preventing the new owner from generating the full synergy potential. One frequent issue I have come across is how to deal with investments whose benefits only materialize after the earn out period, same applies for hiring decisions, new customer ramp ups etc.

    #114279

    Nick Picone
    Participant

    We have used earn-outs in several of our last acquisitions for similar reasons mentioned regarding a gap in valuations between the seller and ours and the earn-out was used to bridge the gap. How the earn-out is calculated becomes a big sticking point during the negotiation and then as mentioned becomes a point of contention post acquisition with regards to any decisions that could impact the earn-out. I would avoid them if I could but it seems like the only way to close the deal when the seller’s expectations are unrealistic.

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