M&A Advisor Tip: Earnouts Can Break a Deadlock

Earnouts can be used to address a perception of risk faced by a buyer. They also are used to bridge a valuation gap between a buyer and a seller. It’s a compromise, of sorts, to break a purchase-price deadlock when the seller wants more than the buyer is willing to pay.

In an earnout, a portion of the purchase price is paid out later, based on the company’s financial performance over time. Earnouts typically last from 1 to 3 years, subject to negotiation.

Some earnouts include acceleration provisions, stipulating that payments are due immediately if certain events occur:

  • Buyer breach of post-closing covenants
  • Termination of key employees
  • Sale of the company or a substantial reduction in assets

These provisions are designed to protect the seller from changes that would hurt the company/buyer’s ability to meet their earnout targets.

Contact us to learn more about deal structures and how we protect your interests in a sale.

What our clients are saying...

“I wanted to thank both of you on behalf of Equity Management Partners for the helpful and very professional manner in which you managed the sale of New England Techni-coil, Inc. As you know well, these types of transactions are often long and complicated and I doubt it could have been successfully completed without your close ongoing involvement.”

- Thomas, Partner

New England Techni-Coil