Accepting an Earnout
When accepting an offer you want to consider the possibilities and if the best offer includes an earnout, you want to take a few factors in to consideration.
You might have multiple LOI’s on the table and multiple offers including several all cash offers and some offers with an earnout.
Obviously the offer with the highest total value and the highest upfront cash is the best offer, but sometimes it is a toss-up.
Let’s compare two scenarios..
1) A high valuation but one is with a lower upfront.
2) A moderate valuation but higher upfront.
Let’s say you got one offer for $25m and another for $17m. Obviously the $25m offer looks like a no-brainer. But it’s not always the case.
Not all offers are apples and apples.
There are three factors.
Factor 1. Who is the buyer? Are they reliable? Do you mesh well together.
Factor 2. What are the particulars meaning how much is upfront and how much is seller financed and what are the terms of the seller financing.
Factor 3. How secure is the seller financing? Is it collateralized by anything? Can you get the assets back?
The upfront amount of the $17m might be much higher and the buyer might be a better party with deeper pockets.
This would especially be essential if you were holding on to a minority stake also.
If you negotiate for a small minority stake as well, you may also exceed what you would get paid with the $25m offer, but you might exceed $25m in total as well.
Plus your responsibilities might be diminished than the other offers which would be important.
You might think you can handle an acquisition on your own which you may be able to, but if we have opened your eyes to anything in the process through a blog post just imagine what we can help with by knowing your exact situation.
Contact us on your next acquisition:
Email – firstname.lastname@example.org
Phone – (800) 773-1523
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