What is an earnout and how do they work?
By Adam Friend | Senior Vice President of Business Development
In many instances, in order to bridge a valuation gap between buyer and seller, to provide upside to a seller for near term growth opportunities, or to protect a buyer from post-closing risks relating to the sustainability of certain client or case revenue, an earnout may be an appropriate structure to facilitate a transaction. The earnout payment is based on the financial performance of the business post-closing, typically during the twelve-month period after closing, sometimes a longer period, and in certain cases have a delayed start.
Veritext bases the earnout on the historical clients of the acquired business, and we ensure that proper credit is given in the event we both have relationships within a given firm. Earnouts align the interests of the seller with Veritext, and we try to structure the earnout and provide support for the seller to earn the full earnout. It’s usually not a “slam dunk”, though, and requires the seller to focus on maintaining and growing their client base to achieve the upside potential. We have an excellent track record of having sellers achieve earnouts, but it is never guaranteed.