Earnouts in Sales of Businesses: Risks and Strategies.

You sell your business for cash plus an amount to be determined based on earnings or other performance measurements of the business over the next 1, 2 or several years after the sale.  This is an “earnout” and can be a very lucrative upside to a seller.  It can also be attractive to a purchaser unable (or unwilling) to fully calculate the value of the business being purchased at the time of sale.

It also has obvious risks, particularly to a seller.  Commonly, the earnout involves a seller who will continue to participate in the business after the sale under some sort of employment or consulting arrangement with the new owners.  This theoretically gives a seller an ability to have some control over the post-closing success of the business, while giving the purchaser a way to incentivize (and control) the seller’s employment or consulting performance.

Continue reading