**Learn all about earn-out agreements - Full Article here -http://bit.ly/distressedbusiness-guide** - What is an earn-out agreement? - What are its advantages/disadvantages? - Should you have one when you are buying/selling a business? Do you want to know more? Go to https://business-sale.com to discover all you need to know about buying & selling a business. LinkedIn: https://www.linkedin.com/company/9449022 Facebook: https://www.facebook.com/CompaniesForSale Twitter: https://twitter.com/businessforsale

1. Using an earn-out
agreement
in a business sale

2. What is an earn-out agreement?
• A contractual pre-arrangement
• Seller receives compensation post-sale, if the financial goals are reached in a
specified period of time
• If drafted properly, it could be beneficial to both the seller
AND the buyer

3. How is it calculated?
• An earn-out calculates the company’s
current and potential purchase value
using predicted future revenue figures

4. Any examples?
• Sure! Vianet Group’s acquisition of Vendman Systems
• £4.2 million sale (payable in cash)  earn-out of £2.25 million (based on targets
achieved)

5. Other benefits?
• Alleviating some of
the uncertainties
surrounding the
business’s value
• Buyer can choose
whether to keep the
seller around

6. What are the risks?
• Manipulation of the agreement
• Short-term successes vs long-term goals
• Two bosses clashing
• Unplanned events that affect payments

7. Has it gone wrong in the past?
• Unfortunately, yes
• AfterMail sale to Quest in 2006
• $15 million sale vs $45 million reported
• Just missed out on the targets set out in the earn-out agreement
Silver lining – The owner set up Xero later, which is now worth billions!

8. How to do it right?
• Establish targets that take the post-purchase “lag” into account
• Eg. Adam&Eve sale to Omnicorn in 2012
• It helps when founders are committed to growing business further post-sale

9. What precautions should I take?
1
2
3
• Financial transparency will be
requested by all buyers
• Clarity is key
• Seller should seek to keep as
much control as possible
• Provisions to protect him/her
• Sometimes a guarantee of a
minimum earn-out payment is
a very viable option

10. With the right advice from professional services and a
structured approach to negotiations, earn-out agreements
can be a valuable way of progressing a successful sale
*Read the full article here: http://bit.ly/earn-out-agreement-bsr