Scarinci Hollenbeck, LLC
The Firm
201-896-4100 info@sh-law.comFirm Insights
Author: Scarinci Hollenbeck, LLC
Date: June 15, 2018
The Firm
201-896-4100 info@sh-law.comEarnouts can play a critical role in mergers and acquisitions by helping buyers and sellers close the deal. However, because they are not appropriate in every transaction, it is important to understand how they work and how to best protect your interests during the negotiation process.
In an earnout sale, the buyer pays less money at the time of the sale but makes additional payments based on the future success of the business. The additional compensation is typically calculated based on a percentage of gross sales or earnings.
Earnouts can be attractive to both sides in a M&A transaction. For buyers, earnouts provide an additional option to finance an acquisition and can lessen the upfront costs. When selling a business, an earnout can help obtain a higher selling price, capturing the value of the ongoing business.
Because earnout payments are tied to the future success of the sold business (or combined business), there are risks. In addition to thoroughly researching the background of the potential buyer, agreements must also be properly drafted to ensure that earnout amounts will be accurately calculated and can be independently verified.
For sellers, it can be beneficial to negotiate an earnout if your business has recently launched a new product or service because it allows you to reap the benefits of your efforts even after the business changes hands. They also make sense when a large majority of your contracts are backloaded, with sizable payments expected to come in after the deal closes.
For buyers, businesses with a steady stream of revenue (vs. singular milestone payments) are more attractive with respect to earnouts. It is also beneficial when the target’s key personnel are expected to remain with the company past the earnout period, as it helps guarantee future success. Earnouts are also frequently used when acquiring startups because they often have a short operating history but a high potential for growth.
For an earnout to work for everyone involved, it must be a fair partnership with clearly delineated and achievable goals. While both sides want the business to remain profitable, the seller is understandably more focused on the company’s performance in the near-term, while the buyer is concerned with how the company will fit into its long-term strategy.
To avoid disputes, the following issues should be thoroughly addressed in the earnout provisions of the transaction:
Earnouts can be essential to bridging the gap in valuations between the seller and buyer. When they are appropriate, it is imperative to work with a knowledgeable corporate attorney who can skillfully negotiate on your behalf.
If you have any questions or if you would like to discuss the matter further, please contact me, Jeffrey Cassin, or the Scarinci Hollenbeck attorney with whom you work at 201-806-3364.
No Aspect of the advertisement has been approved by the Supreme Court. Results may vary depending on your particular facts and legal circumstances.
Corporate transactions can have significant implications for a corporation and its stakeholders. For deals to be successful, companies must act strategically to maximize value and minimize risk. It is also important to fully understand the legal and financial ramifications of corporate transactions, both in the near and long term. Understanding Corporate Transactions The term “corporate […]
Author: Dan Brecher
Ongoing economic uncertainty is forcing many companies to make tough decisions, which includes lowering staff levels. The legal landscape on both the state and federal level also continues to evolve, especially with significant changes to the priorities of the Equal Employment Opportunity Commission (“EEOC”) under the Trump Administration. Terminating an employee is one of the […]
Author: Angela A. Turiano
While filing annual reports may seem like a nuisance, failing to do so can have significant ramifications. These include fines, reputational harm, and interruption of your business operations. In basic terms, “admin dissolution for annual report” means that a company is dissolved by the government. This happens because it failed to submit its annual report […]
Author: Dan Brecher
Antitrust laws are designed to ensure that businesses compete fairly. There are three federal antitrust laws that businesses must navigate. These include the Sherman Act, the Federal Trade Commission Act, and the Clayton Act. States also have their own antitrust regimes. These may vary from federal regulations. Understanding antitrust litigation helps businesses navigate these complex […]
Author: Robert E. Levy
If you’re considering closing your business, it’s crucial to understand that simply shutting your doors does not end your legal obligations. Unless you formally dissolve your business, it continues to exist in the eyes of the law—leaving you exposed to ongoing liabilities such as taxes, compliance violations, and potential lawsuits. Dissolving a business can seem […]
Author: Christopher D. Warren
Contrary to what many people think, corporate restructuring isn’t all doom and gloom. Revamping a company’s organizational structure, corporate hierarchy, or operations procedures can help keep your business competitive. This is particularly true during challenging times. Corporate restructuring plays a critical role in modern business strategy. It helps companies adapt quickly to market changes. Following […]
Author: Dan Brecher
No Aspect of the advertisement has been approved by the Supreme Court. Results may vary depending on your particular facts and legal circumstances.
Consider subscribing to our Firm Insights mailing list by clicking the button below so you can keep up to date with the firm`s latest articles covering various legal topics.
Stay informed and inspired with the latest updates, insights, and events from Scarinci Hollenbeck. Our resource library provides valuable content across a range of categories to keep you connected and ahead of the curve.
Let`s get in touch!
Sign up to get the latest from the Scarinci Hollenbeck, LLC attorneys!