Gary Van Sistine, Business Intermediary
An “earn out” is an option a seller might include in the terms of a listing contract to cover a projected spike in year-end profits that wouldn’t necessarily be averaged into the “trailing 36 months” of company financials.
However, the owner showed us an incredible amount of new orders on his desk and told us that the company will have a phenomenal year…a huge increase from previous year-end figures. He expressed concern that an asking price based on past financials alone would not take into consideration this new business which was happening because of rapid growth in the manufacturing and construction industries.
We suggested an “earn out,” where the buyer and seller agree on a “target goal” in profits to be reached by a specific date…usually a year out from the sale. Since the buyer would be the new owner, he would benefit from these profits, but with the legal “earn out” in place, the seller would also get additional compensation since he initiated the higher-than-average performance.
Earn out contracts are usually set-up by the buyer’s and seller’s accountants and attorneys. It’s the business broker’s role to explain the process to the seller and include the necessary language in the listing contract.