Earn-out
All Terms
What is an Earn-out?
An earn-out is a financial arrangement used in M&A transactions where the seller receives additional compensation based on the future performance of the acquired business. This contingent payment is typically tied to achieving specific financial targets or milestones over a defined period post-acquisition.
How Earn-outs Work
In an earn-out agreement, a portion of the purchase price is deferred and contingent on the acquired company meeting certain performance benchmarks. These benchmarks can include revenue targets, profit margins, or other key performance indicators (KPIs). If the targets are met, the seller receives the additional payment; if not, the payment may be reduced or forfeited.
Advantages
Earn-outs can bridge valuation gaps between buyers and sellers by deferring part of the payment until performance targets are met, aligning interests, and motivating sellers to ensure the ongoing success of the business. They also reduce immediate financial burden on the buyer, spreading payments over time.
Disadvantages
Earn-outs can lead to conflicts due to differing interpretations of performance metrics and targets. Changes in business conditions or management post-acquisition might impact the company's ability to meet targets, creating financial uncertainty for the seller. Additionally, the complexity of earn-out agreements can result in prolonged negotiations and potential legal disputes.
Need help with other corporate finance questions?
Alehar is an international boutique investment bank which works with startups, medium-sized businesses and investors. Our advisory services include Fundraising, M&A and Corporate Finance / Fractional CFO.
We’re passionate about supporting business leaders and their companies with corporate finance and we’d love to help you. To talk to us and find out what Alehar can do for you, please use the section below to contact us, or email us at hello@alehar.com.
Related Terms
Adjusted EBITDA
Adjusted EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is a financial metric used to assess a company's operational performance. It modifies the standard EBITDA by excluding non-recurring, irregular, or non-cash expenses to provide a more accurate reflection of ongoing profitability.
Angel Investors
Angel investors are affluent individuals who provide capital to startups or early-stage companies in exchange for equity ownership or convertible debt. These investors often offer not only financial support but also valuable business expertise and mentorship.
Anti-Dilution Provision
An anti-dilution provision is a clause in an investment agreement that protects an investor from dilution of their ownership percentage in the event that new shares are issued at a price lower than the investor originally paid. It is commonly included in venture capital and private equity agreements.
Bootstrapping
Bootstrapping in business refers to starting and growing a company using personal finances or the company’s operating revenues, rather than relying on external funding or venture capital. Entrepreneurs use their own resources and reinvest profits from initial sales to fund further growth, emphasizing financial independence and careful cash flow management.
Bridge Loan
A bridge loan is a short-term loan used to meet immediate financing needs while waiting for more permanent funding. It serves as a temporary solution to bridge the gap between the need for funds and the availability of long-term financing.
Cap Table
A Cap Table, or Capitalization Table, is a detailed spreadsheet or document that outlines the equity ownership, types of shares, and ownership percentages of a company. It includes information on founders, investors, and employees, as well as the dilution of shares over time through various funding rounds and option grants.
See what Alehar can do for you
Get the freedom to focus on what you do best by partnering with our corporate finance team
Get in Touch