Negotiation: Use Earn-Outs or Noncompete Agreements to Close a Bid-Ask Gap
When a bid-ask gap exists arising from a disagreement between buyer and seller over valuation due to expected target forecast results, consider an earn-out to bridge the gap. It is not easy to make earn-outs work postclosing.
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WHY DO AN EARN-OUT?
- Earn-outs are postclosing contingent purchase price payment mechanisms whereby the seller is paid additional purchase price amounts based on the performance of the target entity after the closing over specific time frames.
- Earn-outs are difficult to:
- Sell to the other side
- Make work after the deal
- Earn-outs are prospective methods of settling perceived differences in risk of achievement of the sellers business forecast leading to variations in expected business performance and business valuation.
- Buyers propose earn-outs to avoid assuming all the business performance risk at the closing.
- The advantage is that the buyer pays less up front but assumes the obligation, in the purchase and sale agreement or as part of an individual consulting ...