The transaction structure is anticipated to result in tax benefits to Cantel presently valued at more than $100 million, which would result in a net purchase price of $625 million for the upfront consideration and up to approximately $675 million in consideration including potential
earnout payments.
Simply stated,
earnout value is equal to the probability of success, or of each possible outcome, multiplied by the amount to be paid given the outcome.
The maximum
earnout payment will result in an overall purchase price multiple of no greater than 7.25 times an annualized adjusted EBITDA achieved over the
earnout period.
The issue that arises in these scenarios is whether the
earnout is a contingent purchase price or compensation to the seller and, in certain circumstances, subject to bifurcation as both a contingent purchase price and compensation.
An
earnout provision may be included in the initial letter of intent or come into the negotiations at later stages if valuation becomes an issue after due diligence.
View A, the liability view, is the view that the transaction premise is based on a transfer of a contingent consideration liability to a counterparty such as a bank or an insurance company, rather than based on the amount that the selling shareholders would be willing to receive in exchange for the
earnout. So the conceptual basis for the measurement is to estimate the consideration required to entice a counterparty to step into an obligation to hold the liability to maturity and pay the
earnout.
Industry data suggests that about half of all business acquisitions by private equity firms involve an
earnout; many acquisitions by strategic buyers also include that feature.
An
earnout provision in a business sale refers to a transactional tool used to compensate a seller for future profits or sales.
Sigma is also entitled to an additional
earnout of some EUR12.5m based on certain conditions.
The primary subject matter of this case concerns the cross-cultural negotiation of an
earnout agreement between Denshi Global Holdings, a publicly-traded Japanese company, and Informatica de Sistemas, S.A,.(IDS) a private Spanish company that Denshi is seeking to acquire.
The sale price includes fixed EUR 5 million (USD 7.1m), an earnings and financial equalisation determined on the basis of the interim financial statements as of August 31, 2009 and a variable purchase price (
earnout) component in amount depending on the company's future business performance.
The minimum consideration for the acquisition of CBS is pounds 5.8 million, payable over a three-year period plus an agreed
earnout. The first tranche is pounds 3.5 million cash, payable on completion.
