Earn-outs can be the trickiest of all contingent payments.
Explaining Earn-Out
What is an earn-out? It is any form of payment that is tied to some future measure of the acquired company’s performance. The seller trusts the buyer to provide the necessary and accurate documents regarding the specifics of it. The key is how it is crafted and defined within the purchase agreement.
Keeping Earn-Out Simple
Keep the earn-out as simple as possible. Overly complicating an earn-out can lead to a bad deal, so base it off of the company’s sales. For sellers, the best chance they have at influencing the earn-out is to remain in the company to some degree. The more direct of an impact they have on it, the more opportunity there is to see it increase. A seller who leaves the company directly after close will probably have little to no control over the earn-out.
Want to learn more about preparing your exit plan for selling your business? Contact the business brokers at George & Company.
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