Earnouts: A Deal Making Tool In A Tough Economy – VC Experts
Has the difficult economy of the last few years forced you to re-think your plans for selling your business? Probably. Should you wait for a full-blown economic recovery before seriously considering selling your business? Not necessarily. Is there a mechanism that can help bridge the gap between the purchase price you were hoping to receive for your business and the lower purchase price you are likely to receive? Absolutely! An earnout can help you bridge the gap between a buyer's concerns about your business and asking price, on the one hand, and your own certainty about the future performance of your business, on the other. So, how does it work? An earnout is a contractual obligation that provides a seller with a higher purchase price – over a designated time period after the closing – provided the seller achieves certain agreed upon targets. In other words, an earnout can enable you to achieve a higher price on the sale of your business because the final purchase price is based, to an extent agreed by the parties, on the future performance of your business. Properly designed, an earnout will cause a buyer to pay a higher purchase price at a level the buyer is comfortable paying and at performance levels the seller believes are reasonably attainable.