The Earnout
The option the seller receives without knowing its value, and whose underlying asset the counterparty controls
The thesis
Financially, an earnout is a call option held by the seller over the future performance of the company it has just sold. It pays about twenty-one cents per contracted dollar, and the underlying asset is managed by the party that pays it
What the study establishes
1
Every real of EBITDA the buyer depresses reduces the earnout due by almost two reais
2
EBITDA is thirteen times more manipulable than revenue, which is why the market has moved to revenue
3
Winning ninety per cent after seven years of litigation is worth less than settling for forty-five in six months
Contents
- The earnout is an option
- What the data say about payment
- The metric and its manipulability
- The incentive, quantified
- Five cases and what each one teaches
- What the dispute costs
- Term and credit risk
- Drafting the clause
- Anatomy of a negotiation
- Brazil and Article 129
- The gaps
- The mandate