In addition to the frequency of payments, the method of measurement must also be determined. There are two general methods: (1) a growth rate of financial performance between the acquisition date and the Earnout maturity date, for example. B annual growth rates (AGGR) for revenue or EBITDA, or (2) achievable absolute value target between the acquisition date and the Earnout maturity date, for example.B. cumulative EBITDA. In mergers and acquisitions (M&A), buyers and sellers are always looking for ways to ensure they get full value. Typically, sellers are asked to make certain presentations about the status of the target business, whose buyers determine the prospects of the business they are acquiring. An inventive way that parties to M&A transactions have devised to reduce the risks to the buyer, including by ensuring that the purchased transaction continues to generate the revenue expected by the buyer, while providing the remuneration that the seller deems fair, is the mechanism of an „Earn-out“ provision in the purchase and sale contract. For example, if the seller thinks the business is worth $100 million and the buyer thinks it`s worth $70 million, they can agree on an initial price of $70 million and the remaining $30 million can be part of the earnout. The US$30 million may depend on factors such as the turnoverLTM RevenueLTM represents Last Twelve Months and resembles in importance TTM or „Trailing Twelve Months“. LTM Revenue is a popular term that is used in the world of finance as a measure of a company`s financial health. It reports or calculates the turnover for the „last 12 months“, EBITDAEBITDA-MarginEBITDA margin = EBITDA / turnover. It is a profitability ratio that measures the profits made by a company before taxes, interest, depreciation and amortization. This guide contains examples and a downloadable model, earnings per share Revenue per share (EPS) Earnings per share (EPS) is a key index used to determine the share of the main shareholder in the company`s profit.
The gain of each common share or the engagement of key employees measures the earnings of each common share. Before you dive deeper, it`s important to consider how some practitioners enjoy earn-outs and how different we are. Some practitioners are in the event that the appropriate way to evaluate earn-outs is to forecast a single „most likely“ cash flow and then discount them to the present with the traditional discount cash flow (DCF) method. Differences of opinion on the valuation of a company in an agreement are not new. The seller wants to get the highest possible price, and he/she may believe that the business is worth more than the buyer thinks. On the other hand, the acquirer is cautious about the growth of the target company or the engagement of key employees or large customers. One possible solution to this dilemma are earnouts that help bridge the gap between an optimistic seller and a skeptical buyer. If you would like to learn more about all forms of structuring the agreement, including earn-outs, I invite you to participate in a generational Equity M&A Executive Conference near you. An investment of a few hours of your time leads to a huge growth in your understanding of the planning/M&A process and protects you from making bad decisions when negotiating with a buyer (provided you don`t have the services of an experienced M&A advisor). Another indicator of an Earn-out is to base the Earn-out on the gross profit of the company or its profit after deduction of turnover costs, but before deduction of operating costs. This method can be a good way to compensate for a difference in valuation in an environment where prices are falling (resulting in lower revenues) and where the cost of turnover is also falling. .