Business Brokers Macomb County Michigan | Oakland County MI Business Brokers
        • INIX Consulting & Brokerage is a full-service Lower Market M&A advisory, Business Brokerage and Valuation firm committed to providing our clients with highest quality service. With local market expertise and national exposure, we are the right choice for your business exit needs.

New accounting rules may require that acquirers and acquiring companies report earnout agreements as liabilities.

Joel Johnson, president of Orchard Partners Inc., in his article, “Earnouts,” published by Valuation Strategies, states: “In a given year, 2% – 3% of announced mergers and acquisition agreements involve earnouts.  These figures probably understate their prevalence.  Earnouts tend to be a characteristic of smaller deals; and in many small deals, terms are not announced.  Earnouts are rare when public companies are acquired and more common when ownership is concentrated among a few shareholders.”

This would mean, if implemented, that earnout agreements must have a value placed on them for accounting purposes. As Joel Johnson points out, “The higher the earnout, the greater the liability.”

Why the Earnout?

Johnson further states that earnouts are used for various reasons:

1. to bridge the pricing gap between the seller who places a heavy emphasis on the company’s projections, and the buyer who places most of the company’s value on its present and past performance.
2. to tie the acquisition payout to future performance.
3. to create a form of seller financing in that some of the buyer’s purchase price is delayed into the future. 4. to establish a form of escrow account in that the money is paid on condition of meeting certain thresholds.
5. to act as a type of employment agreement in that the CEO has to stick around in order to collect.

Share:

More Posts

What Serious Buyers Look For

Obviously, serious buyers want to carefully look at the financials of a company under consideration and all of the other major aspects of the company.

The Benefits of an Advisory Council

Experts recommend considering adding an advisory council to your business. This informal board would provide strategic advice on business management related issues. An advisory council

Cultivating Your Brand Strategy

Your brand is a customer’s perception about your business. It determines how they feel about the services and product that you offer. A consistent brand

An Overview of Term Sheets

If you’re planning on a business agreement to buy or sell a business, you’ll want to know about term sheets. These non-binding agreements will help

Archives
Categories