The maximum earnout
payment will result in an overall purchase price multiple of no greater than 7.
From the seller's perspective, if the seller is an individual and the earnout
is characterized as compensation (including payments for future services and covenants not to compete), the payment will be subject to federal income tax rates of up to 39.
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.
If we assume, for example, that an earnout
is structured so that there's an extra $5 million payment only if revenues exceed a certain threshold, or for some other reason, then, this contingent payment is nonlinear.
When considering an earnout
, it is wise to follow a few broad guidelines:
Deciding what to use as a benchmark is one of the preliminary points to determine in structuring an earnout
Javier and Katsumi are about to begin discussions to craft the elements of an earnout
agreement that has value for both sides, with the added challenge of navigating the often tricky waters of cross-cultural negotiations.
Under an earnout
arrangement, most of the purchase price is paid on settlement, but some is paid by a series of instalments for two to three years after settlement.
The three-year loan includes a $2 million earnout
available if the property meets specified performance criteria.
7 million in debt, up to $4 million in performance-based earnout
payments, and management retention agreements of up to $4.
If the acquired company meets its revenue or profit targets, the earnout
will provide additional post-acquisition consideration.
UK-based IT repair company CRC Group Plc has revised the deal under which it acquired mobile phone repair company AIDL Group in 1998, ending a complicated earnout
arrangement that ran until 2001 with a final payment of 3.