M & A Law Prof Blog

Editor: Brian JM Quinn
Boston College Law School

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Tuesday, May 15, 2012

MoFo's inside view of earnouts

MoFo just released a survey of dealmakers on real deal activity. Probably most interesting are the respondents' views on earnouts:

Respondents had a surprisingly favorable (or at least grudgingly practical) view of earnouts as an acquisition technique. More than 80% said their company (or their client company) included earnout clauses in M&A agreements during the past two years. Among that group, over 30% reported that they've used earn-out clauses in over one-half of their transactions over that period.

...

A Recipe for Conflict?: Almost three-quarters of those who've used earnouts said such clauses have led to subsequent disputes or litigation; nearly one-fifth of respondents estimated there had been post-deal conflict over earnouts up to half of the time. An unlucky 10% of participants said that the use of earnouts had led to disputes or lawsuits more than 75% of the time.

Earnout Alternatives - Asked which other mechanisms might work for closing valuation gaps, respondents cited joint ventures, licensing agreements, and use of buyer or seller debt as viable alternatives.

One thing seems clear, if you're using an earnout, more likely than not you expect some sort of back-end dispute.  Why does anyone want that?

-bjmq 

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