Earn-out

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Earn-out

Refers to an additional payment in a merger or acquisition that is not part of the original acquisition cost, which is based on the acquired company's future earnings relative to a level determined by the merger agreement.

Earn-Out

In an acquisition, an additional payment made to the acquired company's former owner(s) in the event that certain earnings are met. For example, a company may acquire another for $75 million, with an additional $10 million in cash and/or stock if the acquired company's earnings outperform expectations by a certain percentage. Earn-outs are based on the acquired company's potential future earnings.
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M2 EQUITYBITES-May 24, 2017-Helmerich and Payne Acquires Texas-based Motive Drilling for USD 75m Plus Earnouts
Several factors should be considered when determining whether service-related earnouts are contingent on purchase price or compensation, including, but not limited to:
The deal size is USD 55m, to be paid with a combination of cash and equity plus performance-based earnouts.
Earnouts can be extremely complicated or relatively simple, depending on the transaction, but they are never cookie-cutter and have a relatively high risk of future litigation or arbitration unless carefully considered, crafted and documented on the front end.
On the other hand, some other earnouts might have very low probability, very high risk, or have an option-like payout that pays a percentage of revenues or earnings above some high threshold.
Earnouts typically last from one to five years, and account for 15% to 30% of the purchase price.
Many professionals think that earnouts should only be used if absolutely necessary to complete the transaction.
Earnouts terms are normally between one and four years
Available in three-, five-, or seven-year terms, the flexible fixed-rate product also offers additional fundings and earnouts, partial releases and property substitutions.
FASB also is mulling requirements for how companies account for merger-related restructuring expenses, such as the expense of relocating employees and bookkeeping for earnouts.
Earnouts continued to be a significant factor in deals.