Simply put, an earn-out agreement is a contractual prearrangement in an acquisition which mandates that the seller receives additional compensation if the business reaches its discussed financial goals over a specific time frame following the sale.
In some instances, this purchase arrangement can be a separate arrangement within a merger or acquisition’s documentation.
It may appear that the earn-out is mainly set to benefit the vendor as it ensures the maximum possible return on a sale, but if arranged appropriately in certain circumstances, there is no reason why it cannot be a win-win situation for both the buyer and the seller.
In its most basic structure, an earn-out calculates the company’s current and potential purchase value using predicted future revenue figures. This determines
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