Earnouts: Advantages, Disadvantages and How to Structure Them

Abstract

Mergers and acquisitions professionals often disagree on whether the use of earnouts is advisable for completing business acquisitions. Although earnouts can certainly help the parties complete a deal, experience has shown that they may be detrimental in the long run. If not adequately used or structured, earnouts can not only damage the performance of the acquired business, but they can also turn the expectation of a successful deal into the disappointment of a bitter and costly legal dispute. In this paper, the author first explains the notion of earnouts and presents his views on its advantages and disadvantages from the perspective of both the seller and the buyer. He then goes through various issues that should be taken into consideration when structuring earnouts and provides insights on how to deal with them. The author finally concludes this paper by providing six main takeaways that should be remembered when structuring earnouts.