After last nights blog I have been asked more and more questions about the entire concept of Earn Outs. Over the next couple of days a very close friend of mine, Dr. Larry Lerner a specialist in business intermediary transactions has offered his expertise to our readers.
As I am not an expert on this area I will touch on it and wait for Dr. Lerner's expert commentary.
To whom does the Earn Out benefit?
The interesting answer to this is it depends.
It could benefit the seller if the seller is unable to get his purchase price and he has complete confidence in the value of his business. He must not be concerned about the new purchasers ability to run, maintain and build the business. If the seller is concerned that the new buyer will not build the business then the likelihood that the seller will accept the terms of the Earn Out are reduced substantially.
It could also benefit the buyer if the buyer is concerned that contracts that the seller has represented may not transfer to the new buyer. For example a buyer is counting on the continuation of purchase contracts from one particular customer. If the customer should happen to not renew the contract then the buyers expected cash flow will be significantly reduced. If there is an Earn Out then the purchase price of the business will be much less than if the cash flow supported the strike price.
The above are just two examples of how the Earn Out benefits both buyer and or seller.
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