Earnout
M&A / Merger ModelDeferred consideration paid only if the acquired business hits agreed targets after completion.
An earnout bridges a disagreement about the future. The seller believes in a growth case the buyer will not pay for, so instead of arguing to a single number, part of the price is made contingent on the business actually delivering.
The targets are usually financial, revenue or EBITDA over one to three years, and the design matters enormously. EBITDA based earnouts create fights over cost allocation once the business is integrated; revenue based ones are cleaner to measure but let the seller chase unprofitable sales. Either way the seller wants operational independence during the period and the buyer wants to integrate, which is the structural tension.
The accounting is where candidates slip. Under IFRS 3 contingent consideration is recognised at acquisition date fair value, meaning probability weighted and discounted, not at its headline maximum. Later remeasurement generally runs through profit and loss, so an earnout that becomes more likely to pay creates an accounting charge.
For a precedent transactions analysis, that distinction decides your multiple. The press release quotes the maximum, up to some figure. The fair value in the purchase price allocation footnote is the defensible number to divide by EBITDA.
Worked example
A buyer pays 500 at completion plus up to 120 if EBITDA targets are met over two years.
Probabilities of 50% for the full amount, 30% for a partial 60 and 20% for nothing give an expected payout of 78. Discounted two years at 8% that is about 67.
So the deal has three honest numbers: 620 headline, 567 fair value in the acquirer's accounts, and 500 of cash on the day. A precedent multiple should use 567.