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14 Bus. L. Today 49 (2004-2005)
Seller, Beware: In an Earnout, the Buyer Has Doubts; the Seller Has Hopes

handle is hein.journals/busiltom14 and id is 255 raw text is: Seller, beware In an earnout, the buyer has doubts; the seller has hopes. S ure negotiating the sale of a business and the buyer Snd seller are deadlocked on price. The buyer refuses to pay more than six times last years earnings while the seller demands a higher price since earnings are project- ed to double in three years. Believing the projections are unrealistic, the buyer suggests a compromise: I cant justify paying a higher purchase price up front, but I'll pay an addi- tional 10 percent over three years if you achieve the fore- cast. The optimistic seller readily agrees and whispers to his counsel: 1 think this is a good deal, but how can we prevent the buyer from operating the business to reduce the earnout? Contingent payment provisions can often bridge the gap between the sellerl rosy forecast and the buyer healthy skepticism or to motivate owners who continue as employ- Gundersen Is a partner at McCarter & English, LLP, in Wilmington, Del. His e-mail is mgundersen@mccarter.coni. ees. All too often, however, eamout provisions are a major disappointment for the seller and are frequently renegotiated or terminated before they end. if the receipt of post-closing payment, is a critical factor in the sellerb decision to sell, then significant concessions should be obtained in the calcu- lation of the earnout and management of the business post- eliing. More important, the seller6 counsel must thorough- ly Uindersiand the business being sold, how earnings are 1- .culated, what past accounting practices were.used and. what possible business risks are associated with the business. At the outset, every seller should be counseled about die nssof an eamout, since new management will )e responsi- ilY r the achievement of past forecasts. Accepting a dis- cointed cash payment at closing in lieu of an carnout may ::%be; the best choice. Nevertheless, some sellers believe the. . earnings potential is so secure that they would rather receive :tie potential from an earnout over a two- or three-year peri- od than a fraction of that amount paid in cash at closing. * Once you've decided to accept a contingent pay-out, the By MarkJ. Gundersen MarcilAuil2005 -f NO?

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