Why Earnouts Matter

Part of the disconnect between the owners of these businesses and their potential acquirers is the “valuation gap” – the difference in valuation expectations between buyer and seller. Earnouts and other deferred consideration instruments have long been seen as a way to bridge valuation gaps: by reducing risk for the buyer, they enable him or her to pay a higher price.

But earnouts, seller’s notes and other forms of deferred consideration suffer from trust issues. Sellers simply prefer cash. It doesn’t help that stories abound of sellers not achieving earnouts due to mismanagement of the business post-acquisition, or – even worse – not being paid deferred consideration when it is due.