Buying or Selling a Business? In an Uncertain Economy, ‘Earn-Outs’ Can Close a Deal

As the recession deepened, attorney Marcus Lee with Moore & Van Allen (Charlotte, NC) began noticing a trend. More and more of his clients began using earn-outs to close the sale of a business.

“In a buyers’ market, earn-outs are an important tool for sellers when there is a gap between the buyer’s and seller’s expectations of revenue, earnings and value,” says Lee.

An earn-out is a contingent payout, which involves shifting some of the purchase price to be paid in the future on the realization of future earnings or other benchmarks of success. While earn-outs are not new – when Disney acquired Club Penguin in 2007, for example, it paid $350 million upfront, with $350 million more promised through a series of earn-outs – they have grown in popularity due to the continued uncertainty in the economy.

While earn-outs can be highly effective, when they aren’t structured and implemented properly, disputes are inevitable. Lee says there are a few key guidelines that every company should follow to ensure the earn-out is a success.

Lee is available for an interview or to write an article on earn-outs, including outlining how companies can effectively structure and implement the deal. [09/09/2010]