Earn-Outs and Reverse Earn-Outs
During the pandemic there was an “increased focus on earn-out provisions as a method to mitigate the risk of a target’s post-closing under-performance and to bridge any valuation gap between the purchaser and seller,” writes Kiri Buchanan in Norton Rose Fulbright’s Deal Law Wire.
In this post they focus on “(i) reverse earn-out provisions and (ii) a review of the use of earn-outs in 2020 M&A deals.”
“…a ‘classic earn-out’ refers to a post-closing increase in the purchase price based on the achieving of certain performance targets, while a ‘reverse earn-out’ refers to a decrease in the purchase price if the performance targets are not achieved. For greater clarity, in a reverse earn-out scenario, the purchaser pays the maximum amount for the target at closing and if the agreed upon performance targets are not met, the vendor must re-pay an agreed portion of the purchase price, reducing the overall price of the target. Reverse earn-outs are used less often because the risk resides with the buyer, rather than the seller.”
