Earn-outs, where additional consideration is paid post-completion based on the performance of a target business, are becoming increasingly common in private M&A transactions. Our recent survey of European deals between July 2013 and June 2015 shows earn-outs were used twice as often as during previous periods surveyed, although overall, this still represents a small minority of transactions.
So why the increase in earn-outs? According to conventional wisdom, earnouts bridge the valuation gap between buyers and sellers, so they share the risk of the future target business’ performance. Earn-outs have been used for this purpose on a number of recent transactions.