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Why would a business owner agree to an earn-out? That's like handing someone your equity and trying to earn it back from them over three years. I assume this
by codeonfire 14y ago
Why would a business owner agree to an earn-out? That's like handing someone your equity and trying to earn it back from them over three years. I assume this is for acquisitions of unprofitable companies, otherwise traditional valuation methods could be used to determine the price. Buyer beware is a lot better system.
- djt 14y agoBeacause it takes risk away from the purchaser, making it (hypothetically) an easier sale and worth more money. Mergers are extremely susceptible in the first 12-24 months and can actually take down the parent company if mishandled.
- codeonfire 14y agoYeah, but if they are told to meet a specific EBITDA, and the parent is charging expenses to the company, it would be in their interest to charge enough that the earn-out doesn't pay. If the parent gets to write checks with the company's money, then the earn-out goals should be on gross revenue.
- robot 14y agoUsually the idea is to create a much bigger business by partnering up with a large company with a lot of resources. The buyer may offer access to a larger market, expose your company to more to customers and so on.