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How do earnouts work typically?

post #1 of 4
3/11/10 at 1:12pm
Thread Starter 
Say i am being offered 4 million. do i get 60% or so now and the rest over a pre-determined amount of time?
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post #2 of 4
3/11/10 at 1:15pm
a 40% earnout is egregiously buyer-friendly. Often, there are conditions or performance milestones that are attached to the earnout.
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post #3 of 4
3/11/10 at 4:41pm
Quote:
Originally Posted by thekunk07 View Post
Say i am being offered 4 million. do i get 60% or so now and the rest over a pre-determined amount of time?

No MBA and never sold a company so I may not be the best qualified to say, but I gather that the earnout would be paid either by an investor or buyer over a period of time as the company hits it's milestones.

Seems to come up a lot for either tech companies (which are often sold on a promise of future potential) or firms which have other risk factors that would otherwise significantly affect the value, such as a company's reputation being very reliant on the owner's presence.

So if you're selling Kunk Consulting which is valued at $4m based on revenue, but I'm worried that your departure would cause the value to drop like a stone, then I can offer you $2m up-front, $1m after 6 months if business doesn't decline and the final $1m after 12 months.

Again, I'm no MBA, so if anyone knows better please correct me
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post #4 of 4
3/12/10 at 8:07am
60% seems very high. But as above, depends a lot on the individual situation and can get messy if expectations are not clear.

Best to look at similar deals in your industry and seek professional advice.

K
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