Great content and delivery. Thanks for sharing this wisdom. I'm about to start working on a small deal and was wondering what would be other creative ways to structure the deal so as to mitigate risks after closing.
a company made 130k euros net profit in 2023 ( net profit here means after paying everything, taxes, salaries, depreciation,etc) and in 2022 made 45k net profit, and in 2024 they are expecting net profit similar to 2023 ( they already made 60% of the same grosss sales as in 2023)....i want to buy this company and i am not sure how much i should offer for the total deal and how much of it should be offered as earnout ? any help here is appreciated , this is a real situation in Germany i have at the moment
The seller would be expecting a multiplier of let’s say 3 years min of that profit plus any amounts within the expenses which relate to owner personal earnings. On the second part - the bigger the differed part the better, let’s say 50 % down payment and 25 in two steps after 12 and 24 months…
We see revenue and EBITDA targets used most often. Due to its litigation-provoking nature, we're not huge fans of EBITDA, although it is still a popular choice. Net income shows up (it raises similar concerns to EBITDA). Financial targets are usually set as increases over a baseline (e.g., trailing 12 months before closing, prior fiscal year). I can't point to any "typical" revenue or EBITDA increase amount. Sometimes the target is flat (maintaining the baseline revenue or EBITDA). If I had to guess, I'd say that 10% - 20% increases year over year, something like that, are relatively common. It depends so much on the particular business, though, so don't put too much stock into those percentages (as averages). We often see two earnout measurement periods (e.g., an earnout based on increasing revenue by 10% in the first year post-closing and, separately, increasing revenue by a collective 20% in the first two years post-closing). Occasionally, we use non-financial targets, such as transitioning contracts, launching a new product, or keeping key employees (i.e., successfully moving them to the new business and, with employees, retaining them for some amount of time). When used, I'd say that earnouts account for approximately 20% of the deal value (ranging from 10% - 30%, although we've done 100% earnout deals!), i.e., the upward limit of an earnout would add a max. of 25% to the fixed consideration, e.g., upfront payment of $12MM and possible earnout payments of $3MM. It feels like earnout structures are relatively evenly split between all-or-nothing and graduated approaches. With all-or-nothing, if the buyer clears the target threshold, the buyer pays the full earnout. With a graduated approach, if the buyer hits 50% of the target, the buyer pays a proportionate amount (it could be 50%, it may be scaled a little differently). Similar to how EBITDA and net income earnout targets often lead to disputes, all-or-nothing approaches are risky because a buyer may have an incentive to control the business to come in just below the target. Hence, sellers are upset and suspicious when that happens (even if it happened without any manipulation whatsoever). Brett
Yesterday we posted a video on closing accounts vs. locked box approach. Here's a link - ua-cam.com/video/ydfu0lpiDjc/v-deo.html. I hope it's helpful to you!
Love all your videos man! Such a smart dude.
Great content and delivery. Thanks for sharing this wisdom. I'm about to start working on a small deal and was wondering what would be other creative ways to structure the deal so as to mitigate risks after closing.
Great video. Learning so much. Thanks a lot.
Thank you for the video!! Very informative.
You're welcome!
Wonderful content! Congratulations on the amazing video
a company made 130k euros net profit in 2023 ( net profit here means after paying everything, taxes, salaries, depreciation,etc) and in 2022 made 45k net profit, and in 2024 they are expecting net profit similar to 2023 ( they already made 60% of the same grosss sales as in 2023)....i want to buy this company and i am not sure how much i should offer for the total deal and how much of it should be offered as earnout ? any help here is appreciated , this is a real situation in Germany i have at the moment
The seller would be expecting a multiplier of let’s say 3 years min of that profit plus any amounts within the expenses which relate to owner personal earnings.
On the second part - the bigger the differed part the better, let’s say 50 % down payment and 25 in two steps after 12 and 24 months…
How long should the 'Earn Out' period be?
What is the average 'Earn Out' Period?
one or two years is common
Earnouts are a trap. Pay me now or don’t buy my business.
What are some quantitative variables that are used to calculate the earnout consideration and performance targets?
We see revenue and EBITDA targets used most often. Due to its litigation-provoking nature, we're not huge fans of EBITDA, although it is still a popular choice. Net income shows up (it raises similar concerns to EBITDA). Financial targets are usually set as increases over a baseline (e.g., trailing 12 months before closing, prior fiscal year). I can't point to any "typical" revenue or EBITDA increase amount. Sometimes the target is flat (maintaining the baseline revenue or EBITDA). If I had to guess, I'd say that 10% - 20% increases year over year, something like that, are relatively common. It depends so much on the particular business, though, so don't put too much stock into those percentages (as averages). We often see two earnout measurement periods (e.g., an earnout based on increasing revenue by 10% in the first year post-closing and, separately, increasing revenue by a collective 20% in the first two years post-closing).
Occasionally, we use non-financial targets, such as transitioning contracts, launching a new product, or keeping key employees (i.e., successfully moving them to the new business and, with employees, retaining them for some amount of time).
When used, I'd say that earnouts account for approximately 20% of the deal value (ranging from 10% - 30%, although we've done 100% earnout deals!), i.e., the upward limit of an earnout would add a max. of 25% to the fixed consideration, e.g., upfront payment of $12MM and possible earnout payments of $3MM.
It feels like earnout structures are relatively evenly split between all-or-nothing and graduated approaches. With all-or-nothing, if the buyer clears the target threshold, the buyer pays the full earnout. With a graduated approach, if the buyer hits 50% of the target, the buyer pays a proportionate amount (it could be 50%, it may be scaled a little differently). Similar to how EBITDA and net income earnout targets often lead to disputes, all-or-nothing approaches are risky because a buyer may have an incentive to control the business to come in just below the target. Hence, sellers are upset and suspicious when that happens (even if it happened without any manipulation whatsoever).
Brett
Thanks for sharing!
Jesus christ this is gold. All your videos are great.
thank you, Andres!
Please don’t use the lords name in vain
Awesome videos! very helpful and informative. Any chance you can do one on purchase price adjustments? (closing accounts vs. locked box etc.)
yes. In fact, I have one "in the can" about that exact topic. We'll get it up soon.
Yesterday we posted a video on closing accounts vs. locked box approach. Here's a link - ua-cam.com/video/ydfu0lpiDjc/v-deo.html. I hope it's helpful to you!
Awesome and succinct.
Thank you, Marcus.
Earnouts, more often paid than earned :)
Awesome video mate! G’day from Australia.
Thank you, Brad.